General Issues

• • Apportionment Factor Update: Alabama Act 2021-1 amends Section 40-27-1 to change the apportionment factor to a single sales factor. All business income shall be apportioned to this state by multiplying the income by the sales factor. Origin sales shipped from this state in which the purchaser is the United States government or the taxpayer is not taxable in the state of the purchaser are no longer included in the sales factor. This change is for Corporate Income Tax and Pass Through Entity.
  • New Taxpayer Registration Information: If you are a new entity without an ALDOR taxpayer account, a new taxpayer/account registration application is required to be completed using My Alabama Taxes. For information required to register, visit Business Registration and click on the New Entities tab. If you are an existing entity without a My Alabama Taxes tax account, click on the Existing Entities tab for information.

Individual Income Tax

Foreign Income Exclusion: Beginning in 2018, we now recognize the federal Form 2555 Foreign Earned Income Exclusion. You can exclude up to $104,000 of income from tax pursuant to section 26 USC 911. If you are entitled to a foreign income exclusion, then please attach a copy of your Federal Form 2555 to your return and report the amount of your exclusion as a credit in parenthesis (e.g., (30,000)) on Form 40 or 40NR, line 8 Other Income on page 2 of your return. All foreign income must be reported on your return in order to receive any foreign income exclusion.

Costs to retrofit or upgrade home to resist wind or flood damage: Alabama residents may deduct from gross income the lesser of 50% of the cost or $3,000 to retrofit or upgrade their home to resist wind or flood damage. The taxpayer must have a certification as prescribed under Chapter 31D, Title 27, Code of Alabama 1975, or the Alabama Residential and Energy Codes Board.

Deposits to a catastrophe savings account: Alabama residents may deduct from gross income deposits made to a catastrophe savings account. The deduction is $2,000 if the insurance deductible is equal to or less than $1,000. If the deductible is greater than $1,000, then the amount of the deduction is the lesser of $15,000 or twice the amount of the insurance deductible. If the taxpayer is self-insured and chooses not to obtain insurance, then the deduction is the lesser of $250,000 or the value of the taxpayer’s legal residence. For more information, see the Catastrophe savings Account FAQs.

Contributions to a Health Savings Account (HSA): Alabama residents may deduct from gross income deposits made to a health savings account. The HSA contributions are defined as contributions made by a taxpayer to his or her HSA up to the maximum amount allowed pursuant to 26 USC §223. Any contributions made to a heath savings account using pre-tax dollars are not deductible.

Deposits to an Alabama First-Time and Second Chance Home Buyer Savings Account: Alabama residents who have not owned or purchased individually or jointly a home 10 years prior to the purchase of the first-time home in Alabama may now take a deduction for contributions made to a first-time and second chance home buyer savings account. Individuals must open an account with a financial institution which is designated as a first-time and second chance home buyer savings account on or after January 1, 2019. Only the account holder(s) are eligible for a deduction. Individuals or organizations that contribute to an account on behalf of the taxpayer will not be eligible for any deductions for the contribution. The funds must be used by December 31 of the fifth year to purchase a home in Alabama or the entire funds balance must be included in the account holder’s income. Taxpayers must maintain and submit annually with their return any supporting documentation provided by the financial institution for the account. Funds withdrawn for reasons other than to purchase a first-time home will require the taxpayer to include both the entire balance of the fund, including any accumulated earnings, in income in the year of withdrawal and a penalty equal to 10% of the amount withdrawn. Any earnings on the account are not taxable if used for the purchase of a first home in Alabama. Schedule HBC needs to be completed along with specific documentation.

Certified Firefighter Insurance Premiums: Effective with tax year 2020, certified Alabama firefighters may deduct 100% of insurance premiums paid for cancer insurance coverage as defined in Act 2019-361, provided the premiums have not been deducted from federal gross income or are deductible under any other law. Insurance premiums paid with pre-tax dollars will not be deductible.

Pass-Thru Entities

Apportionment Factor Update: Alabama Act 2021-1 amends Section 40-27-1 to change the apportionment factor to a single sales factor. All business income shall be apportioned to this state by multiplying the income by the sales factor. Origin sales shipped from this state in which the purchaser is the United States government, or the taxpayer is not taxable in the state of the purchaser are no longer included in the sales factor.

Electing Pass-Through Entity: Alabama Act 2021-1 allows Alabama S-Corporations and Subchapter K entities (passthrough entities or PTEs) to elect to pay Alabama income tax at the entity level. Entities making this election (Electing PTEs) must notify ALDOR by filing Form PTE-E via My Alabama Taxes at any time during the tax year but no later than the 15th day of the third month following the close of that tax year for which the entity elects to be taxed as an Electing PTE. Entities making this election are required to file Form EPT, in addition to Form 65 or Form 20S, and submit estimated tax payments.

Estimated Payments for Electing Pass-Through Entity: Electing Pass-Through Entities that have an Alabama income tax liability in excess of $500 must pay estimated tax. An Electing Pass-Through Entity shall be subject to the provisions of Section 40-18-80.1, Code of Alabama 1975 (estimated tax for corporations). The required installments shall be 25% of the required annual payment. Required annual payment generally means the lesser of a) 100% of the tax shown on the return for the taxable year, or b) 100% of the tax shown on the return of the corporation for the preceding taxable year.

Financial Institutions Excise Tax

Act Number 2019-284 established the Financial Institution Excise Tax Reform Act of 2019. The Act provides for an estimate payment system; alternate distribution formula to pay the counties and municipalities; updated law to provide clarification and reflect current policies and procedures. For more information, see the Financial Institution Excise Tax FAQs.

Estimated Payments for Financial Institutions: Financial Institutions that have an Alabama income tax liability in excess of $500 must pay estimated tax. A Financial Institution shall be subject to the provisions of Section 40-16-5.1, Code of Alabama 1975 (estimated tax for corporations). The required installments shall be 25% of the required annual payment. Required annual payment generally means the lesser of a) 100% of the tax shown on the return for the taxable year, or b) 100% of the tax shown on the return of the corporation for the preceding taxable year.