According to the Alabama Instructions, "Military personnel, whose legal residence is Alabama, are subject to Alabama income tax on all income regardless of the source or where earned unless specifically exempt by Alabama law..."
If you are a resident of Alabama, you are subject to Alabama income tax on all income regardless of the source. This includes Active Duty Military Pay no matter where it was earned.
If you are a nonresident of Alabama, stationed in Alabama whose only source of income is active duty military pay, you are not required to file an Alabama return. If you have to file an Alabama return, you would need to deduct the active duty military pay from the return.
If the state on the W-2 is not Alabama, the income will not be taxed on the state return. If the employer withheld Alabama taxes in error, you will need to go to:
- Federal Section
- Income
- W-2
- Edit the servicemember's W-2
- Remove the amount listed in Box 16 for state wages.
- Click Continue to save.
- File a Non-Resident return for Alabama to get the state taxes refunded that were withheld in error.
If one spouse is a resident of Alabama and the other is not, you can file separate state returns. You can file the federal return and wait for the return to be accepted. Then, change the filing status for the primary taxpayer and file a separate return for the first spouse. The second spouse will need to create a new account and file a separate return in that account.
For additional information, see