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Live in Alabama, Work in Indiana: Which State Taxes Your Paycheck?

Both states — credit offsets the double taxIndiana withholds

Answer

You file twice: Indiana first, then Alabama. There is no reciprocity agreement between these two states, so Indiana taxes the income where it was earned and Alabama taxes it again as resident income — with the resident credit removing the double charge rather than an exemption form preventing it.

Last verified

Two states can lawfully tax the same wages: Indiana because the work happened there, Alabama because you live there. Nothing prevents the overlap in advance — it is unwound afterwards, on the Alabama return, through the credit for taxes paid to another state.

A Alabama resident taxed by another state on the same income claims the credit for taxes paid to other states on Schedule CR. The credit is capped at the Alabama tax on that income, so it removes the double tax but never refunds the excess when the other state charges more.

Indiana also has a layer below the state one, and it is the layer that survives every agreement: Every Indiana county levies its own income tax, and the reciprocal agreements do not cover it. A resident of a reciprocal state who works in Indiana still pays Indiana county tax on those wages.

What you file

  1. 1Nonresident return · IndianaForm IT-40PNR

    File the Indiana nonresident return FIRST — you need the Indiana tax figure before you can complete Alabama.

  2. 2Resident return · AlabamaSchedule CR

    File a Alabama resident return reporting all income, then claim the credit for tax paid to Indiana. The credit is capped at what Alabama would have charged on that same income, so if Indiana taxes it at a higher rate the difference is not refunded.

The two states, side by side

 AlabamaIndiana
Taxes wagesYes — graduatedYes — flat
Reciprocity partnersNone5 (Form WH-47)
Convenience ruleNoNo
Nonresident returnForm 40NRForm IT-40PNR
Credit for other-state taxSchedule CRSchedule 6 (Form IT-40PNR)
Nonresident safe harbourNone publishedNone published
Local income taxYesYes
Revenue departmentAlabama Department of RevenueIndiana Department of Revenue
Last verified

The other direction

Reversing the commute does not always reverse the answer. Living in Indiana and working in Alabama gives:Both states — credit offsets the double tax.

Indiana to Alabama →

Same two states, different situation

The withholding answer turns on how you are paid and where the work happens, not only on which two states are involved.

Other Alabama pairs

Questions people actually ask

I live in Alabama and work in Indiana. Which state takes the tax out of my paycheck?

You file twice: Indiana first, then Alabama. There is no reciprocity agreement between these two states, so Indiana taxes the income where it was earned and Alabama taxes it again as resident income — with the resident credit removing the double charge rather than an exemption form preventing it.

Which state should my employer be withholding for?

Indiana. The wages are sourced to Indiana, so Indiana withholding is correct and there is no Alabama withholding to set up.

Will I end up paying tax twice on the same income?

Not twice over, but you will pay the higher of the two rates. Alabama gives residents a credit for tax paid to Indiana on the same income, claimed on Schedule CR. The credit is capped at the Alabama tax on that income, so if Indiana taxes it more heavily the excess is not refunded by either state.

How current is this?

The Alabama and Indiana rules on this page were last checked against Alabama Department of Revenue and Indiana Department of Revenue on 2026-08-07. We re-check the full grid every December after state legislative sessions close, and re-check the convenience-of-the-employer states quarterly because that is where the rules move fastest.

Sources

Every fact above comes from the revenue department that publishes the rule. We do not cite secondary summaries, and we do not restate a figure we could not find at source.