Live in Illinois, Work in Alabama: Which State Taxes Your Paycheck?
Answer
Expect withholding in Alabama and a return in both. Illinois and Alabama hold no reciprocal agreement, so the overlap is resolved after the fact: Alabama taxes the Alabama-source wages, and your Illinois resident return claims a credit for that tax against the Illinois liability on the same income.
Last verified
Without an agreement between Illinois and Alabama, the overlap is handled after the fact rather than prevented. That is why the filing order matters: the Alabama figure is an input to the Illinois return, so completing Illinois first means doing it twice.
A Illinois 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 Illinois tax on that income, so it removes the double tax but never refunds the excess when the other state charges more.
Alabama also has a layer below the state one, and it is the layer that survives every agreement: Several Alabama municipalities levy an occupational licence fee on wages earned inside the city — Birmingham is the largest. It is collected by the city, not the Department of Revenue, and no state agreement or credit covers it.
What you file
- 1Nonresident return · AlabamaForm 40NR
File the Alabama nonresident return FIRST — you need the Alabama tax figure before you can complete Illinois.
- 2Resident return · IllinoisSchedule CR
File a Illinois resident return reporting all income, then claim the credit for tax paid to Alabama. The credit is capped at what Illinois would have charged on that same income, so if Alabama taxes it at a higher rate the difference is not refunded.
The two states, side by side
| Illinois | Alabama | |
|---|---|---|
| Taxes wages | Yes — flat | Yes — graduated |
| Reciprocity partners | 4 (Form IL-W-5-NR) | None |
| Convenience rule | No | No |
| Nonresident return | Form IL-1040 with Schedule NR | Form 40NR |
| Credit for other-state tax | Schedule CR | Schedule CR |
| Nonresident safe harbour | 30 days | None published |
| Local income tax | No | Yes |
| Revenue department | Illinois Department of Revenue | Alabama Department of Revenue |
| Last verified |
The other direction
Reversing the commute does not always reverse the answer. Living in Alabama and working in Illinois gives:Both states — credit offsets the double tax.
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.
- Remote worker: Illinois → AlabamaHome state only
- 1099 contractor: Illinois → AlabamaHome state, plus the client state if you work there
- Moved mid-year: Illinois → AlabamaTwo part-year returns
Other Illinois pairs
Questions people actually ask
I live in Illinois and work in Alabama. Which state takes the tax out of my paycheck?
Expect withholding in Alabama and a return in both. Illinois and Alabama hold no reciprocal agreement, so the overlap is resolved after the fact: Alabama taxes the Alabama-source wages, and your Illinois resident return claims a credit for that tax against the Illinois liability on the same income.
Which state should my employer be withholding for?
Alabama. The wages are sourced to Alabama, so Alabama withholding is correct and there is no Illinois 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. Illinois gives residents a credit for tax paid to Alabama on the same income, claimed on Schedule CR. The credit is capped at the Illinois tax on that income, so if Alabama taxes it more heavily the excess is not refunded by either state.
How current is this?
The Illinois and Alabama rules on this page were last checked against Illinois Department of Revenue and Alabama 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.
- Illinois Department of Revenue — individual income taxaccessed 2026-08-07
- Alabama Department of Revenue — individual income taxaccessed 2026-08-07