Alabama Legislature Passes Bill to Address Calculation of Credit for Taxes Paid to Other States - State & Local Tax Alert: Alabama Edition

by Bradley Arant Boult Cummings LLP

Bradley Arant Boult Cummings LLP

Gov. Kay Ivey signed House Bill 384, into law last Wednesday, March 28, ending a debate that has lasted for almost a decade over the scope of the individual income tax credit for certain taxes paid to other states. The Alabama Society of CPAs led the effort on the taxpayer side. This bill should provide certainty regarding how Alabama residents (and their tax preparers) calculate the credit for certain income and gross receipts-based taxes they paid to other states, either directly or because of their ownership of a pass-through entity (such as an LLC or S corporation) doing business in those states. But there are special filing deadlines, as described below.

The act confirms that the credit for taxes paid to another state shall not be used to offset the portion of a taxpayer’s income tax liability that is attributable to Alabama sources. In other words, the credit may only be used to offset a taxpayer’s income tax liability that is truly attributable to income from other states.

This legislation is the result of litigation, Moody v. Alabama Department of Revenue, invalidating Rule 810-3-21-.03, which the Alabama Tax Tribunal found was an additional limitation on the credit not authorized by the enabling statute, Ala. Code § 40-18-21. This compromise legislation essentially codifies the rule, which has been in effect since 2013, but only on a prospective basis. Thus, refunds may be due for calendar years 2013 through 2017 subject to the applicable statutes of limitations and further subject to a special filing deadline in the act that requires refund claims for pre-2017 years to be filed with the ADOR by June 30, 2018. The act assumes that taxpayers will file their 2017 Alabama individual tax returns without the additional limitation on the tax credit imposed by the rule and the current Schedule CR.

Background and Litigation over the Tax Credit Calculation

Alabama residents have historically been allowed to claim a credit for taxes they paid to other states. The credit has been the lesser of (1) the tax actually paid to the other state or (2) the tax that would be due to Alabama on that income, using Alabama’s 5 percent individual income tax rate. Because of the relatively unique deduction for federal income taxes (FIT) claimed on their Alabama tax returns, however, Alabama residents have a relatively low effective tax rate.  

The ADOR promulgated the rule, effective in 2013, which imposed an additional limitation on the credit and effectively denied taxpayers the use of their full FIT deduction, which is authorized by the Alabama Constitution as well as by statute. However, the Alabama Tax Tribunal ruled in early 2017 that the additional limitation in the rule was invalid, and exceeded the scope of the enabling statute. The ADOR appealed that ruling to Baldwin County Circuit Court but later agreed to dismiss its appeal, with prejudice, and to issue the refund requested by Mr. and Mrs. Moody. (Our firm was privileged to represent the Moodys in the Circuit Court appeal).

Since that time, many taxpayers have filed refund claims with the ADOR, asserting a larger credit for taxes paid to other states based on the statute rather than the rule. Additionally, the ADOR has entered assessments against a number of taxpayers who followed the Moody ruling in calculating their tax credit.

Summary of Next Steps:

  • This act is effective for tax years beginning on and after January 1, 2018, e., prospectively only.
  • The ADOR is directed to grant valid refunds for tax years 2013 through 2016, but only if refund claims are timely filed by June 30, 2018 (yes, that’s a Saturday).
  • For the 2017 tax year, taxpayers and return preparers should calculate the tax credit without the additional limitation in the rule and file their returns accordingly.
  • The ADOR is also to dismiss all assessments and appeals related to the calculation of the tax credit that were based on the limitation contained in the rule and to so notify the taxpayer.

Jeannine Birmingham, president and CEO of the ASPCA, concluded: “After many years of discussion and debate, we’re pleased to finally have resolution on how to calculate the Alabama tax credit for income tax paid on income earned in another state.”


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Bradley Arant Boult Cummings LLP | Attorney Advertising

Written by:

Bradley Arant Boult Cummings LLP

Bradley Arant Boult Cummings LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.