New Alabama law means federal COVID benefits won’t raise state income taxes

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Alabama taxpayers will not have to pay more income tax due to the increased federal child tax credits they received last year.

Governor Kay Ivey signed into law a bill to protect the benefits most families with children received under the American Rescue Plan Act (ARPA), passed by Congress in March 2021, from tax on state revenue.

ARPA, intended to help households and businesses with the costs of the COVID-19 pandemic, provided part of the increased credits in the form of monthly payments of up to about $250 per child from July to December last year. ARPA also increased the Earned Income Tax Credit and Dependent Tax Credit benefits.

In Alabama, without changes to state law, federal benefits would reduce the deduction for federal taxes paid that Alabama taxpayers use to reduce their state income tax.

The bill Ivey signed allows taxpayers to disregard increased tax credits when calculating their deduction for federal taxes paid.

“I’m proud to sign off on this much-needed tax relief so the money gets right back into the hands of hard-working Alabamians,” Ivey said in a press release. “I commend the Alabama Legislature for their work on this and look forward to it benefiting Alabama families this tax season.”

What about Alabama taxpayers who have already filed their 2021 taxes?

The Alabama Department of Revenue (ADOR) has issued instructions on how such taxpayers can take advantage of the new law.

Taxpayers who filed their taxes electronically through a third-party provider will not need to do anything to receive the benefit. The ADOR will automatically recalculate the federal income tax deduction for eligible taxpayers who filed electronically before the new law took effect.

Taxpayers who have previously filed using ADOR’s My Alabama Taxes online portal or who have filed paper returns can amend their returns to take advantage of the deduction. The ADOR specifies that for the time being the rectifying declarations can only be filed by filing a paper declaration. ADOR plans to post a link to the updated instructions soon.

See ADOR guidelines.

The new law should benefit many people.

ARPA has increased the child tax credit for 2021 from $2,000 to $3,600 for children under age 6 and from $2,000 to $3,000 for children ages 6 to 17. From July to December, most families with children received up to about $250 per month for each child. Couples whose adjusted gross income was less than or equal to $150,000 and single parents whose income was less than $75,000 received the full benefit.

According to a analysis by the Center on Budget and Policy Priorities, approximately 560,000 Alabama families with a total of approximately 930,000 children received monthly child tax credit payments. An overwhelming majority spent the money on basics such as food, clothing, rent, mortgage and utilities, the center’s analysis showed.

Sen. Dan Roberts, R-Mountain Brook, and Rep. Jim Carns, R-Vestavia Hills, sponsored the bill.


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