Differences Between Alabama and Federal Adjustments to Gross Income

These deductions are especially prized by taxpayers because they are available even in situations where the taxpayer does not itemize deductions. Some of the more common differences between the Alabama and Federal adjustments to gross income are listed below:

Educator Expenses

Federal law allows educators to deduct up to $250 per year of their unreimbursed out-of-pocket expenses for classroom supplies, etc. as an adjustment to Adjusted Gross Income, therefore making these expenses deductible regardless of whether the taxpayer itemizes deductions. Any excess of actual expenses over the $250 limit is reported on Schedule A as a Miscellaneous Itemized Deduction, subject to the 2% of AGI limitation. On the Alabama return, all such expenses must be treated as Miscellaneous Itemized Deductions.

Self-employment Tax

Federal law provides that 1/2 of any self-employment taxes reported on line 58 of Form 1040 is deducted as an adjustment to gross income. There is no corresponding Alabama adjustment. However, self-employment taxes are an itemized deduction in the year paid for Alabama purposes, and the "year paid" is considered to be the year in which the return reporting the SE taxes is filed. So, assuming the returns are filed on a timely basis, an Alabama taxpayer deducts the SE taxes shown on her 2007 Federal return as an itemized deduction on her 2008 Alabama return. Is that confusing enough?

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Self-employed Health Insurance Premiums

Correction: Earlier, this site erroneously reported that Alabama did not follow the federal law allowing self-employed individuals to deduct the premiums they pay for health insurance coverage for themselves and their family. In fact, Alabama does follow the federal law on this point, and the deduction is allowed as an adjustment to Alabama gross income.

Employee Health Insurance Premium Deduction

The 2008 session of the Alabama Legislature passed new Section 40-18-15.3 effective for 2009 tax years. The new provision allows certain "Qualifying Employees" of "Qualifying Employers" to claim 50% of the premiums they pay for health coverage as an adjustment to Alabama gross income. The same employee may also deduct 100% of his health insurance premiums paid as an itemized deduction, assuming that his total medical deductions exceed 4% of Alabama Adjusted Gross Income. For purposes of this provision:

  • A Qualifying Employee is an Alabama resident who earns $50,000 or less in wages during the year, and who reports $75,000 or less in Alabama Adjusted Gross Income ($150,000 for a married couple).
  • A Qualifying Employer is one who has 25 or fewer employees.

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Prepaid Affordable College Tuition (PACT) Program Donations

Alabama reseidents can deduct up to $5,000 per year ($10,000 for a married couple filing jointly) from gross income for payments into the PACT Program or the Alabama College Education Savings Program.

Retrofit/Upgrade Expenses

The killer storms that swept across the northern two-thirds of Alabama in April of 2011 stimulated our legislature to move with uncharacteristic promptness. Within less than a month, they had enacted legislation to provide an adjustment to gross income for expenses incurred by taxpayers to retrofit or upgrade their residence to resist wind and/or flood damage. The amount of the adjustment is the lesser of

  • 50% of the cost incurred, or
  • $3,000.
The taxpayer must obtain certification from the Alabama Residential and Energy Codes Board in order to claim this deduction.

Deposits To A Catastrophe Savings Account

This is another tornado-inspired addition to our tax code. It provides an adjustment to gross income for deposits made to a catastrophe savings account. The amount allowable depends on the deductible payment on the taxpayer's homeowner insurance policy:

  • If the deductible is $1,000 or less, the adjustment is limited to $2,000,
  • If the deductible is greater than $1,000, the adjustment is the lesser of (a) two times the deductible, or (b) $15,000, and
  • If the taxpayer is self-insured, the deduction is the lesser of (a) the value of the taxpayer's residence, or (b) $250,000.

This page updated on 2/10/13

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