Differences Between Alabama and Federal Itemized Deductions

Alabama has no provision corresponding to the Federal cutback on itemized deductions for taxpayers whose Adjusted Gross Income (AGI) exceeds a certain threshold amount. In addition, there are differences in some of the other categories of itemized deductions, and some of them can be material.

Medical Expense Deduction

Qualified long-term care (LTC) premiums are deductible as a medical expense deduction on the Federal return, subject to the overall limitation based on AGI. On the Alabama return, LTC premiums are deductible as a separate itemized deduction, therefore not limited by AGI. It is also worth noting that Alabama has a new adjustment to gross income for 50% of health insurance premiums paid by certain employees of Qualifying Employers (those with 25 or fewer employees). Taxpayers claiming that adjustment may also report 100% of their health insurance paid as a medical expense on Schedule A, subject to the AGI limitation.

Also, there is a significant difference in the calculation of the AGI limitation for medical deductions. On the federal return, otherwise deductible medical expenses are actually deducted only to the extent that they exceed 7 1/2% of Federal AGI. Alabama law, however, allows medical expenses to be deducted to the extent that they exceed 4% of Alabama AGI.

Taxes Paid

Alabama income taxes paid are deductible as an itemized deduction on the Federal return; but are not deducted on the Alabama form. On the other hand, Alabama does allow a deduction (not as an itemized deduction, but separately) for the Federal income tax liability on that year's Federal return. FICA and Medicare taxes withheld on current year wages, as shown on Forms W2, are an allowable Alabama itemized deduction, as is any Self-employment tax paid during that year. Self-employment tax is considered to be paid in the year when the Federal return reporting that tax is filed.

Assume, for example, that an Alabama taxpayer files her returns on a timely basis, and reports $200 of Self-employment tax on her 2003 return, and $700 of SE tax on her 2004 return. Her 2004 deduction on Alabama Schedule A for SE taxes paid will be $200 (the amount on the 2003 return). She will deduct the $700 of 2004 taxes on her 2005 Alabama return.

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Interest Expense

In general, the interest expense deduction will be the same on the Federal and Alabama returns. A possible area of disagreement relates to the investment interest expense deduction, which is limited to investment income for the year. To the extent that Alabama and Federal interest, dividends and capital gains from the sale of investment property are different, there could also be a difference in the amount of investment interest expense that is deductible.

Charitable Contributions

There are really no differences between Alabama and Federal contributions, except, of course, that Alabama's overall limitation for cash contributions to a public charity is 50% of Alabama AGI, which gives rise to occasional differences in limitations and carryovers.

Miscellaneous Itemized Deductions

As is true with the Federal deduction, Alabama miscellaneous itemized deductions are deductible only to the extent that they exceed 2% of Alabama AGI. The actual items eligible to be deducted are the same for both the Federal and Alabama returns.

This page last updated 2/10/13

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