If you are a resident of Alabama you are subject to state income tax on your income from all sources, whether in or outside of Alabama. Part-year residents are subject to state income tax on their income from all sources during the period they are residents, and on income earned from a source in Alabama before or after leaving the state. And nonresidents are subject to state tax only on income earned in Alabama.
When you prepare your Alabama income tax return you report all your taxable income and then subtract certain adjustments to determine your Alabama adjusted gross income. From this amount you subtract your standard deduction or itemized deductions, a deduction for your federal income tax, and your personal and dependent exemptions to arrive at your Alabama taxable income.
Based on your taxable income you find your tax in the tax table, unless you have a net operating loss that you are carrying forward or carrying back. In that case you would have to complete and attach Form NOL-85A. You can then subtract any credits you qualify for to determine your net tax liability. From this amount you subtract the Alabama state income tax withheld during the year and any estimated tax payments you have made to arrive at the amount of your refund or the amount you owe.
Some of the income tax rules in Alabama are the same as, or similar to the federal income tax rules, but some are different. Some income may be taxable on your federal return but is excluded for Alabama state income tax purposes. And there are deductions and credits you may be able to claim in Alabama that you couldn’t claim on your federal return. So it is important to be aware of the tax benefits available to you in Alabama. If you use tax software to prepare your federal and Alabama tax return you may be prompted to take all the deductions and credits you qualify for. But you should check your Alabama return before sending it to be sure you have claimed all the benefits you qualify for. And if you prepare your return on paper you will need to know what tax benefits you can claim.
Retirement income
Social security and railroad retirement benefits are not subject to state income tax in Alabama. Several other types of retirement income are also excluded, such as benefits from the United States Retirement System, the State of Alabama Teachers’ Retirement System, the State of Alabama Employees’ Retirement System, the State of Alabama Judicial Retirement System, and the Tennessee Valley Authority Pension System. Payments you receive from a defined benefit retirement plan are also excluded from your taxable income in Alabama. And, if you are an Alabama fire fighter or peace officer, your retirement compensation is not subject to income tax in Alabama.
Military personnel
If you are in the military and are stationed in Alabama but are not a resident, you do not have to file an Alabama state income tax return unless you have other taxable income in the state, aside from your military pay.
Military pay for active service in a designated combat zone is excluded from your income subject to Alabama state income tax. Military allowances for quarters, subsistence, uniforms and travel are also excluded.
If you are laid off, terminated or displaced from your job as a result of administrative downsizing, up to $25,000 of your severance, termination pay or unemployment compensation is exempt from Alabama state income tax.
Adjustments to Income
You can claim a deduction for contributions to an Individual Retirement Account (IRA). The limitations on the amount you can deduct are the same as the limitations for federal income tax purposes, except that in Alabama you would use the adjusted gross income reported on your Alabama tax return before taking into account the IRA deduction. If you are self-employed you can claim a deduction for contributions to a Keogh plan or to a Simplified Employee Pension (SEP) plan.
You can deduct any penalty you were charged for early withdrawals from a time savings deposit prior to maturity. This penalty is reported on the Form 1099-INT that you receive from the bank or savings and loan association.
If you make alimony or separate maintenance payments under a court decree, you can claim a deduction for these payments to the same extent they are deductible on your federal income tax return.
If you adopted a child, you can claim a deduction on your Alabama tax return for reasonable medical and legal expenses you paid in connection with the adoption.
Employees and self-employed taxpayers can claim a deduction for moving expenses related to their work to the same extent they are allowed as a deduction for federal income tax purposes. But for purposes of your Alabama tax deduction, the move must have been to another location within the state of Alabama, and your new workplace must be at least 50 miles farther from your old residence than your old workplace was from your former residence.
If you are self-employed, you can claim a deduction for health insurance premiums to the same extent you can claim the deduction on your federal income tax return.
You can claim a deduction of up to $5,000 per year for payments you make to the Alabama Prepaid Affordable Tuition (PACT) Program or the Alabama College Education Savings Program.
Itemized or Standard Deduction
On your Alabama state income tax return you can either itemize your deductions or claim the standard deduction. The standard deduction in Alabama is taken from a table in the instructions, based on your filing status and your Alabama adjusted gross income.
The itemized deductions you can claim on your Alabama tax return are similar to the itemized deductions on your federal return, but there are some differences. You can claim a deduction for medical expenses to the extent they exceed 4% of your adjusted gross income on your Alabama tax return (line 10 on Form 40). And, qualified long-term health care premiums are not included in medical expenses for Alabama tax purposes; they are reported separately and are deductible in full on line 25 of Schedule A.
The taxes you can claim as an itemized deduction on your Alabama return include real estate taxes and the FICA tax (social security and Medicare) withheld from your pay, or the equivalent federal self-employment tax. You can also deduct railroad retirement taxes, state unemployment insurance taxes, federal gift taxes, personal property taxes, and generation-skipping transfer taxes.
The interest you can deduct is generally the same as the interest you can claim as an itemized deduction on your federal return. Charitable contributions are also the same, except that when calculating the limitations, you must use your Alabama adjusted gross income and not your federal adjusted gross income.
The casualty and theft loss you can claim on your Alabama return is calculated the same way as on your federal return, except that you can only claim the loss in the year the loss occurred or the theft was discovered, and a loss of personal property has to be reduced by 10% of your Alabama adjusted gross income.
Most miscellaneous itemized deductions, such as job-related expenses and expenses incurred to produce or collect taxable income, are subject to the 2% of Alabama adjusted gross income limitation.
Deduction for federal income tax
On your Alabama state income tax return you can deduct your federal income tax liability. This is the total tax that appears on your federal tax return and not the amount of federal tax that was withheld. You enter the amount from line 11 on federal Form 1040EZ, line 37 on Form 1040A, line 56 on Form 1040 plus any additional tax on IRAs or other qualified retirement accounts reported on line 59 of Form 1040, or line 51 on Form 1040NR plus any amount you report on line 54 of Form 1040NR. These are the line numbers on the forms for 2008 and may change in subsequent years. You should report the amount from the corresponding total tax line, plus the additional tax on IRAs or other qualified retirement accounts.
Credits
If you paid taxes to another state for income that is included in your Alabama tax return, you can claim a credit on your Alabama return for the taxes you paid to the other state. You report these taxes on Schedule CR which is an attachment to Alabama Form 40.
There are other credits you can claim if you qualify, which are reported on Schedule OC. If you are an employer, you can claim the basic skills education credit for 20% of the costs of providing your employees with basic skills education programs approved by the Alabama Department of Education. Licensed physicians who practice medicine and reside in small or rural Alabama communities of less than 25,000 residents with admission privileges to a small or rural hospital with an emergency room can claim a credit of up to $5,000 for up to five consecutive years. Other credits are available for coal producers, businesses that locate in economically depressed areas designated as enterprise zones and new businesses that make capital investments in qualified projects in Alabama.
Sources: Alabama Form 40 Booklet – Alabama Department of Revenue
