What income is exempt from Alabama tax?

United States Retirement System benefits.

State of Alabama Teachers’ Retirement System benefits.

State of Alabama Employees’ Retirement System benefits. State of Alabama Judicial Retirement System benefits.

Military retirement pay.

Tennessee Valley Authority Pension System benefits.

United States Government Retirement Fund benefits.

Payments from a “Defined Benefit Retirement Plan” in accordance with IRC 414(j). Contact your retirement plan administrator to determine if your plan qualifies.

Federal Railroad Retirement benefits.

Federal Social Security benefits.

State income tax refunds.

Unemployment compensation.

Welfare benefits.

Disability retirement payments (and other benefits) paid by the Veteran’s Administration.

Workman’s compensation benefits, insurance damages, etc., for injury or sickness.

Child support.

Gifts, money, or other property you inherit or that was willed to you.

Dividends on veteran’s life insurance.

Life insurance proceeds received because of a person’s death.

Interest on obligations of the State of Alabama or any county, city, or municipality of Alabama.

Interest on obligations of the United States or any of its possessions. Amounts you received from insurance because you lost the use of your home due to fire or other casualty to the extent the amounts were more than the cost of your normal expenses while living in your home. (You must report as income reimbursements for normal living expenses.)

Military allowances paid to active duty military, National Guard, and active reserves for quarters, subsistence, uniforms, and travel.

Subsistence allowance received by law enforcement and corrections officers of the State of Alabama.

All retirement compensation received by an eligible fire fighter or a designated beneficiary from any Alabama firefighting agency.

All retirement compensation received by an eligible peace officer or a designated beneficiary from any Alabama police retirement system.

Death benefits received by a designated beneficiary of a peace officer or fireman killed in the line of duty.

Income earned while serving as a foreign missionary after first serving 24 months as a missionary in a foreign country.

Compensation received from the United States for active service as a member of the Armed Forces in a combat zone designated by the President of the United States.

An amount up to $50,000 (for tax years 2020 and forward) and $25,000 (for tax year 2019) received as severance, unemployment compensation or termination pay, or as income from a supplemental income plan, or both, by an employee who, as a result of administrative downsizing, is terminated, laid-off, fired, or displaced from his or her employment, shall be exempt from state income tax. If the exempt severance pay is included in your state wages, contact your employer for a corrected W-2.

Beginning January 1, 1998, all benefits received from Alabama Prepaid Affordable College Tuition Contracts (PACT).

Alabama College Counts 529 fund.

Income received from the Department of Defense as a result of a member of the military killed in action in a designated combat zone.

Any income earned by the spouse in the year of death of a member of the Military who has been killed in action in a designated combat zone.

Beginning January 1, 2016, all income, interest, dividends, gains or benefits of any kind received from an ABLE (Achieving Better Life Experience) savings account.

**Effective with tax year 2020, insurance benefits received by a certified firefighter as a result of a cancer diagnosis to any extent the amounts are included in the federal adjusted gross income of the taxpayer and are not exempt under any other law. For more information please see Act 2019-361.