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Alabama Severance Pay Exemption

A law passed during the 1997 regular session of the Alabama Legislature, allows for an exemption from Alabama income taxes for certain employees who lose their jobs as a result of administrative downsizing.

Act number 97-705, now codified as section 40-18-19.1, Code of Alabama, 1975, exempts the first $25,000 of severance pay (including unemployment compensation, termination pay, or income from a supplemental income plan) received by an employee, who, as a result of “administrative downsizing” loses his or her job.

Rule number 810-3-19.1-.01, which became effective on March 12, 2009, requires employers to apply for approval to exempt the severance payments. Employers may request approval for the exemption by submitting their written request to:

Kathleen Abrams, Director
Individual and Corporate Tax Division
Alabama Department of Revenue
PO Box 327410
Montgomery, AL 36132-7410

The request must accompany the company’s downsizing plan and must provide the following information:

  • Alabama Withholding Account number
  • Federal Employer ID number
  • The reason for administrative downsizing
  • The number and description of employees affected
  • The total amount of benefits to be paid to the affected employees which will be exempted
  • The method used to compute the severance pay
  • The calendar year of payment of exempt severance pay
  • List of the employees including their first and last name, last 4 digits of their SSN, position held, date of separation, full amount of Severance Pay and exempt amount of Severance Pay (up to $25,000). For lists with multiple employees, please total the columns with the full amount of Severance pay and exempt amount of Severance pay for all employees.

The employer should also provide a copy of any severance/termination information that is distributed to the affected employees. Please allow 30 days for the processing of your application.  Employers must obtain approval to exempt the payments for each calendar year the payments are made.

Alabama income tax must not be withheld when exempt severance payments are made. Also, the amount of the exempt severance payments should not be included in Alabama taxable wages (box 16) of the employee W-2 form, but should be disclosed in box 14 (Other) of the W-2 as exempt severance payments.

Fax the approval letter to (334) 242-0112.

Questions & Comments

Laura Walden