The Deduction for Federal Income Tax

Alabama is one of a very few states that allows a deduction against state taxable income for federal income tax. The Alabama deduction is actually written into our constitution, so the only way we could ever do away with it would be to pass a constitutional amendment. For tax years beginning after December 31, 1998, the amount that is deductible is the liability shown on the current year Federal return, regardless of the amount of Federal income taxes actually paid during the year. The deduction for federal income tax is allowable whether or not the taxpayer itemizes deductions. The deductible federal income tax does not include federal self-employment taxes, although those taxes are deductible as an itemized deduction in the following year.

The Department of Revenue provides a worksheet in the instructions for computing the Federal Income Tax Deduction. The table below shows the beginning number for Line 1 of the worksheet depending on which Federal form you filed:

If You FiledThe Amount on Line 1 Is
Form 1040EZThe amount from Line 10
Form 1040AThe amount from line 35
Form 1040The amount on line 55
Form 1040NRThe amount on line 52

For many taxpayers, this amount will be the deduction. However, if you claim any one of several listed credits on your Federal return, you must subtract the sum of those credits from the Federal income tax amount (reducing the deduction). The credits involved are Earned Income Credit, Additional Child Tax Credit, American Opportunity Credit, and the Business Credits from Forms 2439, 8801, and 8885. The worksheet gives detail about the line numbers to reference for each of these credits.

There are two circumstances where the otherwise deductible Federal income tax liability must be pro rated. A part year Alabama resident pro rates his deduction by the ratio that his Alabama adjusted gross income bears to his federal AGI. Also, when a married couple files a joint federal return, but elects to file separately in Alabama, each of them is entitled to a portion of the federal tax liability deduction from their joint federal return. The Alabama instructions say that each of them computes the deduction by applying the ratio that their Alabama AGI bears to the couple's combined federal AGI.

Non-Resident taxpayers filing Alabama Form 40NR are entitled to deduct their entire federal income tax liability without proration. However, if the non-resident taxpayers filed a joint federal return and are filing separately in Alabama, they must pro rate the federal income tax deduction as discussed in the previous paragraph.

This page last updated 2/8/13.

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