Alabama Administrative Code
Title 810 - ALABAMA DEPARTMENT OF REVENUE
Chapter 810-3-15 - DEDUCTIONS FOR INDIVIDUALS GENERALLY
Section 810-3-15-.20 - Federal Income Tax Deduction - Individuals

(a) FIT: Federal income tax. Depending on the method used for computing FIT (cash basis or accrual method), deductible federal income tax may include:

(b) Federal income tax does not include:

(c) FIT Paid: Payment includes FIT withholdings, FIT paid by the taxpayer, and FIT paid through wage garnishments.

(d) FIT Accrued: Imposed FIT payable for the year.

(e) Paid or Accrued: Either paid or accrued, but not both.

(f) Transition Year: The year in which the method of computing the FIT deduction is changed; i.e., from cash method to accrual method or vice versa. The change in method can be the result of taxpayer's request or a Revenue Department directive.

(g) To Contest: To challenge via some objective act of protest, substantiated by some affirmative evidence of denial of liability by the taxpayer.

(a) FEDERAL INCOME TAX DEDUCTION FOR RESIDENTS: Net federal income tax may be deducted for the taxable year in which paid or accrued. Taxes are deductible only by the person or entity upon whom they are imposed. A cash basis taxpayer may allocate his federal income tax deduction on the cash basis or accrual basis. Once a method is selected, it shall be consistently applied from year to year, unless approval for a change is obtained from the Department. An accrual basis taxpayer must allocate his federal income tax deduction using the accrual basis.

(b) FEDERAL INCOME TAX DEDUCTION FOR NONRESIDENTS:

The FIT deduction for Alabama shall be apportioned according to the ratio of adjusted gross income from Alabama sources to the total adjusted gross income from all sources (as computed under Alabama law, not federal law). Each annual FIT deduction must be computed separately. Cash basis nonresidents may compute the FIT deduction on the cash basis or may elect to compute it on the accrual basis. The election, once made, must be consistently applied from year to year unless prior written approval for a change is obtained from the Department.

(a) Any other change in methods must be effective with the first day of a tax year.

(b) Any tax year in which a change of methods occurs is a transition year.

(c) There are two ways the method can be changed:

(a) Year of change from cash basis to accrual basis: Any FIT refund received must be reported as income and additional FIT paid must be deducted.

(b) Year of change from accrual basis to cash basis: Any FIT refund received during the transition year for previous tax years shall not be reported as income. Any additional tax paid during the transition year for previous tax years may not be deducted.

(c) After a change from cash to accrual method in non-transition years, refunds of previously deducted accrued taxes must be reported as income and payments of taxes for an accrual basis year, not previously deducted, may be deducted.

1. Uncontested FIT is deducted in the year for which it is imposed.

2. Contested FIT is deducted in the year in which the liability becomes fixed and certain, but in no case later than the year in which the tax was actually paid. "Contested FIT" may include FIT amounts that have been changed under an amendment to or an audit of the taxpayer's federal income tax return, unless the change is properly reflected on an amended Alabama income tax return within the statutorily prescribed time for petitioning for refund.

3. Refunded FIT is reported in the year received but only if the taxpayer received a prior-year tax benefit from deduction of the FIT refunded.

4. EXAMPLE 1: A taxpayer using the accrual basis had $1,200 withheld from his earnings during 20X8 for federal income taxes. In March 20X8, he paid $100 additional tax on his 20X7 liability and $200 on his declaration of estimated tax for 20X8. He paid an additional assessment of $300 on his 20X5 income in September 20X8, thereby settling a disputed liability for 20X5. The taxpayer determined early in 20X9 that his federal income tax liability for 20X8 would be $1,700. He had previously paid $1,400 and, therefore, would have to pay an additional $300. He may deduct $1,700 accrued for 20X8 plus $300 accrued during 20X8 on his contested 20X5 liability, for a total of $2,000. He may not deduct $100 paid in 20X8 on his 20X7 liability, since this amount accrued in 20X7 and should have been deducted in that year.

5. EXAMPLE 2: Using the same facts as in the above example, a taxpayer using the accrual basis made the same payments as listed above, except that he received a $300 refund of 20X5 taxes, for which he received a tax benefit, in September, 20X8, thereby settling the disputed 20X5 liability. The taxpayer determined early in 20X9 that his federal income tax liability for 20X8 would be $1,700 and that he had paid $1,400 and would have to pay an additional $300. He may deduct the $1,700 accrued for 20X8. He may not deduct the $100 paid in 20X8 on his 20X7 liability, since this amount accrued in 20X7 and should have been deducted in that year. The $300 refund accrued during 20X8 on his contested 20X5 tax liability should be reported as income on his 20X8 return.

6. EXAMPLE 3: A nonresident taxpayer had adjusted gross income in 20X9 from sources within Alabama of $10,000 and adjusted gross income from sources within and without Alabama of $25,000. Data regarding his federal income tax is:

For the 20X9 tax year, the ratio of adjusted gross income from sources within Alabama to adjusted gross income from sources within and without Alabama is 40% ($10,000 divided by $25,000). Assuming the taxpayer had consistently used the accrual method, the FIT deduction for 20X9 would be $2,200.00 ($5,500.00 x 40%). He may not deduct the $300 paid in 20X9 on his 20X8 liability, since this amount accrued in 20X8 and should have been deducted in that year.

1. EXAMPLE 4: Proration Based on Federal Adjusted Gross Income

The husband deducts $1,500 on his state return and the wife deducts $900 on her state return for federal income tax. Total federal income tax deducted on both state returns is $2,400, the amount to be prorated.