Alabama Passes Tax Cut For Low Income Taxpayers

In what has to be considered a historic step in the direction of a less regressive tax code, the Alabama Legislature has passed, and Governor Riley has signed into law, a bill that raises the "tax threshold" for Alabama taxpayers. Under prior law, a family of four had to pay state income tax on all income above $4,600, the lowest such threshold in the United States. The new law adjusts both the standard deduction and the dependent exemption amounts to raise the point at which that same family begins paying tax to $12,500 of income.

Standard Deduction

Alabama taxpayers can currently claim a standard deduction in lieu of itemized deductions of the lesser of

  • 20% of their Adjusted Gross Income (AGI), or
  • $4,000 for a married couple or $2,000 for a single taxpayer.
For tax years beginning after December 31, 2006, the standard deduction available to a married couple filing a joint return with AGI of $20,000 or less is $7,500. For couples with AGI of greater than $20,000, the standard deduction is reduced by $175 for each $500 of AGI above $20,000; but the standard deduction is never lower than $4,000. Corresponding adjustments are made to the standard deduction amounts for married filing separately, head of family, and single taxpayers (table). (See the separate article on this site regarding Alabama filing status.)

So, for example, assume that a single taxpayer has AGI on her 2007 Alabama tax return of $25,000. Her standard deduction will be $2,250, computed as $2,500 - (25/500 * 5,000). If, in 2008, the same taxpayer has an Alabama AGI of $35,000, her standard deduction will be the minimum for her filing status of $2,000. The computed standard deduction would be $1,750 [$2,500 - (25/500 * 15,000)], but by law her deduction cannot drop below $2,000.

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Dependent Exemption

Alabama taxpayers may currently claim a personal exemption ($3,000 for married filing jointly or head of family, and $1,500 for married filing separately or single), and an additional exemption amount of $300 for each dependent. The personal exemption amounts remain unchanged in the new law, but there are significant increases in the dependent exemption amounts for some taxpayers. For tax years beginning after 12/31/06, taxpayers with AGI of $20,000 or less (regardless of filing status) will be able to deduct $1,000 for each dependent other than a spouse. Taxpayers with AGI between $20,000 and $100,000 will deduct $500 for each dependent. Taxpayers with AGI above $100,000 will continue to deduct $300 per dependent.

Many Win, None Lose

According to Governor Riley's press release on April 14, about 60% of all Alabama individual taxpayers will realize some benefit from the new law. Apparently, this is the portion of our population with AGI of $100,000 or less. There are no losers, since the standard deduction and dependent exemption amounts for upper income taxpayers remain what they were before the new legislation. No losers, that is, except for our Special Education Trust Fund, which receives all income tax revenues, and will definitely take a hit . Even there, there is a provision in the bill to change the way the state allocates its interest income to partially reimburse the SETF for its losses under the new law.

The hypothetical family of four with income of $12,500 (well below the national poverty level) will have Alabama tax savings of $243 as shown in the table below. It's not like winning the lottery, but it is a start.

This page last updated 4/21/06

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