Yesterday, Alabama House Bill 231 and Alabama Senate Bill 152 were forwarded to Governor Kay Ivey for signature. This legislation, when signed, will effectively exempt from state income taxes certain federal benefits that taxpayers received from the American Rescue Plan Act last year, a coronavirus relief bill passed by Congress.
The exemption applies to the enhanced federal child tax credits, earned income tax credits, and dependent care tax credits that households received from ARPA, which was intended to help offset the financial stress caused by the COVID-19 pandemic.
The Alabama Society of Certified Public Accountants recently sent out the following guide which addresses many frequently asked questions.
Which Alabama taxpayers does this new legislation impact?
Taxpayers who received the advance child tax credit payments during 2021 and/or who will report the additional child tax credit on their 2021 individual tax returns
- Taxpayers with qualifying children under the age of 18 as of 12/31/2021
- Taxpayers with 2021 adjusted gross income (AGI) below the following levels are most likely to be impacted (phase-out applied above these levels):
- Married filing jointly: $150,000
- Married filing separately: $75,000
- Head of household or Single: $112,500
Taxpayers who will report a dependent care credit on their 2021 individual tax returns
- Taxpayers with:
- Children under age 13 as of 12/31/2021, who paid eligible expenses for child and dependent care during the year; or
- Dependents or spouses who are physically or mentally incapable of caring for themselves and who lived in the taxpayer’s home for more than ½ of the year; and
- AGI less than $438,000 during 2021.
Taxpayers who will report an earned income credit on their 2021 individual tax returns.
Note: Alabama taxpayers who do not fall into one of these three categories are not impacted, and their Alabama individual income tax returns can be filed without delay.
What components of these federal tax credits are now excluded from Alabama income taxation?
Child tax credit/advance payments: The additional 2021 $1,600 per child federal credit for children under age 6 and the additional $1,000 per child credit for children ages 6-17
Dependent care credit: The additional 2021 federal credit resulting from the increased credit percentage and increased qualifying expenditure limits for 2021
- Maximum credit for 1 child under the 2020 methodology= $1,050; maximum credit for 1 child under the 2021 methodology = $4,000
- Maximum credit for 2+ children under the 2020 methodology = $2,100; maximum credit for 2+ children under the 2021 methodology = $8,000
Earned income credit: Increased federal earned income credit resulting from modifications to the earned income credit calculation in 2021
How will the 2021 Alabama federal income tax deduction for the impacted individuals be calculated?
The 2021 Alabama federal income tax deduction will be reduced by the amount of the child tax credit, dependent care credit, and earned income credit which would have been available to the taxpayer under the provisions of the Internal Revenue Code effective for the tax year ended 12/31/2020.
To calculate this amount, taxpayers should utilize their 2021 information and the methodology shown on the 2020 Form 8812 (child tax credit), 2020 Form 2441 (dependent care credit), and the 2020 Form 1040 worksheets for the earned income credit.
- For the child tax credit, the maximum reduction in the Alabama federal tax deduction will be $2,000 per eligible child, but the amount could be less depending on the taxpayer’s specific circumstances.
- For the dependent care credit, the maximum reduction will be $1,050 for one child or $2,100 for two or more children, but again could be less depending on the taxpayer’s specific circumstances.
- For the earned income credit, the reduction will depend on the number of qualifying children and will be in the range of $538-$6,660.
When will the Alabama Department of Revenue issue revised instructions for the 2021 Form 40?
The Alabama Department of Revenue has already started the process of revising the instructions, and we expect guidance to be issued soon after the legislation is signed by Governor Ivey.
When will the necessary updates be made to the various tax return preparation programs?
The Alabama Department of Revenue has indicated that revised instructions will be transmitted to the major software providers as soon as possible. The amount of time required for the software updates will vary depending on the provider. We encourage ASCPA members to proactively communicate with their software providers concerning this issue.
If an individual is impacted by this legislation and has already filed his/her 2021 Alabama income tax return, will an amended return be necessary to claim a refund?
Unless additional guidance is issued by the Alabama Department of Revenue, the impacted individual will need to amend the 2021 tax return and submit the amended return to the Alabama Department of Revenue for processing. A petition for a refund must be filed within three years from the date the return was filed, or two years from the date of payment of the tax, whichever is later, or if no return was timely filed, two years from the date of payment of the tax.
If you have any questions, please contact your Dent Moses advisor.