If you are a surviving spouse or other beneficiary receiving a Survivor Benefit Plan annuity and you live in Alabama, the state does not tax a dollar of it. The same goes for the Reserve Component Survivor Benefit Plan (RCSBP) and the older Retired Serviceman's Family Protection Plan (RSFPP). Depending on the size of the annuity, that is typically several hundred dollars a year, often $660 to $840 or more, that stays with you instead of going to Montgomery. There is no application and no approval letter. The exemption is built into Alabama's income tax law, and your only job is to make sure your return reports the annuity as exempt instead of taxable.
What it is
When a military retiree elects the Survivor Benefit Plan, DFAS pays a monthly annuity to the surviving spouse or another designated beneficiary after the retiree dies. Alabama exempts that annuity from state income tax entirely.
The legal hook is Code of Alabama Section 40-18-20. Subsection (a) exempts military retirement compensation "and survivor benefits derived therefrom," and later amendments to the same section removed the original dollar cap, so the exemption is now total. SBP, RCSBP, and RSFPP annuities are exactly that: survivor benefits derived from military retirement. The Alabama Department of Revenue's list of income exempt from Alabama income taxation names military retirement pay among exempt items, and the official MyArmyBenefits page for Alabama states it plainly: SBP, RCSBP, and RSFPP annuities are exempt from Alabama income tax.
One critical distinction before the math. This is a state exemption only. SBP annuities remain taxable on your federal return, and DFAS will send you a Form 1099-R every January. Do not confuse SBP with Dependency and Indemnity Compensation (DIC), which is a separate VA benefit for survivors of service-connected deaths and is not taxed by the federal government or any state. This guide covers the annuity DFAS pays; we cover DIC separately in our DIC survivor benefits guide.
What it's worth
The honest math first. These figures are modeled estimates of tax avoided, not a payment Alabama sends you. SBP pays the beneficiary 55% of the retiree's covered retired pay, a rate set by statute in 10 U.S.C. 1451. On a base of about $24,000 a year in retired pay, the annuity is about $13,200 a year, and Alabama's top 5% income tax rate, which applies to taxable income over $3,000 filing single or $6,000 filing jointly, applied to that annuity works out to about $660 a year kept. A larger annuity of about $16,800 a year saves about $840. Your real savings scale with the size of the annuity and your other income.
Alabama's income tax runs 2% to 5%, and the 5% bracket starts at just $3,000 of taxable income for a single filer ($6,000 married filing jointly), so most of a typical annuity would otherwise land in the top bracket. Scale the estimate to your own annuity:
| Annual SBP annuity | Approximate Alabama tax avoided at 5% |
|---|---|
| $8,000 | $400 |
| $13,200 | $660 |
| $16,800 | $840 |
| $20,000 | $1,000 |
| $30,000 | $1,500 |
Two planning notes. First, the exemption applies to the annuity specifically. Alabama still taxes a surviving spouse's wages, most traditional IRA and 401(k) withdrawals, and investment income at its normal rates, so your total Alabama bill depends on your whole income mix. Second, this exemption survives the retiree. Alabama exempted the retiree's own retired pay while they were alive (see our Alabama military retirement tax exemption guide), and the same statute keeps the survivor annuity exempt after their death. The tax treatment does not get worse for the household at the worst possible moment.
Who qualifies (and who doesn't)
You qualify if:
- You receive an annuity under SBP, RCSBP, or RSFPP as a surviving spouse or other designated beneficiary. The statute covers survivor benefits derived from military retirement, so the exemption follows the annuity, not just a spouse.
- You are an Alabama resident for income tax purposes. The exemption only matters where Alabama could otherwise tax the payment.
Who doesn't benefit:
- Survivors receiving only DIC. DIC is already free of federal and state tax everywhere, so there is nothing for Alabama to exempt. If you receive both DIC and an SBP annuity, this exemption covers the SBP portion.
- Nonresidents. If you live in another state, that state's rules govern your annuity, and some states still tax survivor annuities in whole or in part.
- Beneficiaries of non-military annuities. A civilian employer's survivor pension is covered by different Alabama rules. Check the ADOR exempt income list for how a specific plan is treated.
If your situation is unusual (a non-spouse beneficiary such as a child or insurable-interest annuitant, part-year residency, or an annuity divided under a court order), confirm the treatment with the Alabama Department of Revenue before filing.
How to claim it
There is no application. The exemption is claimed on your Alabama income tax return.
- File your Alabama return as usual (Form 40 for residents). Current returns use Schedule RS to report retirement distributions, and exempt distributions are listed separately from taxable ones. Your SBP annuity gets reported there without adding a dollar to your Alabama tax. Do not skip reporting it; exempt means listed and not taxed, not omitted.
- Do not let software tax it. The DFAS 1099-R arrives every January because the annuity is federally taxable. When your tax software asks about the source, identify it as a military survivor annuity so the program excludes it from Alabama income. If a paid preparer includes it as taxable Alabama income, have them correct it.
- Amend if you missed it. If Alabama tax was paid on an SBP, RCSBP, or RSFPP annuity in a prior year, you can file an amended Alabama return to recover it. Alabama allows refund claims for a limited number of prior years; confirm the current window with the Alabama Department of Revenue before assuming a year is still open.
The Alabama Department of Veterans Affairs can also point survivors to a county Veterans Service Officer for free help sorting out which survivor payments are which.
Related benefits
The annuity exemption is one piece of what Alabama and the VA offer surviving families:
- Alabama military retirement tax exemption is the companion benefit: the same statute exempts the retiree's own retired pay while they are alive.
- DIC survivor benefits covers the separate VA payment for survivors of service-connected deaths, which stacks its own tax-free income on top of an SBP annuity.
- Alabama surviving spouse property tax exemption explains which property tax breaks continue after a disabled Veteran's death.
Inside the app, the state benefits calculator shows Alabama's full stack for your household in one place.
What to do next
If you are a surviving spouse, you are eligible for more than most families ever claim, and the programs do not advertise themselves. Start your free benefits scan and we will check you against over 4,000 federal and state benefits, each with a dollar value and an official source, so this exemption becomes one line in your full total.