SB 342

Under current law, Alabama individual residents are entitled to an income tax credit for taxes paid directly or on their behalf to other states and territories

This bill provides that the income tax credit on income derived from sources outside of the state only offset the portion of the taxpayer’s income tax liability that is attributable to income derived from non-Alabama sources

To amend Section 40-18-21, Code of Alabama 1975, relating to the income tax credit for taxes paid on income from sources outside the state; and to provide that the income tax credit for taxes paid on income from sources outside the state only offset the portion of the taxpayer’s income tax liability that is attributable to income derived from non-Alabama sources.

Section 1

Section 40-18-21, Code of Alabama 1975, is amended to read as follows:

§40-18-21.

(a)(1) For the purpose of ascertaining the income tax due under the provisions of this chapter by individual residents of Alabama whose gross income, as defined herein, is derived from sources both within and outside the State of Alabama, there shall be allowed a credit against the amount of tax found to be due by such resident, on account of income derived from outside the State of Alabama, the amount of income tax actually paid by such resident to any state or territory on account of business transacted or property held, directly or indirectly, outside the State of Alabama. Resident individual owners of Subchapter K entities, Alabama S corporations, and beneficiaries of estates or trusts who include their proportionate share of the income arising from one or more of these entities in their Alabama gross income shall be allowed a credit for their proportionate share of the income tax actually paid by the entity to any state or territory on account of business transacted or property held outside the State of Alabama, whether the payment was made on behalf of the resident individual owner or because the entity was not recognized by such state or territory as a non-taxable pass-through entity. For purposes of this subsection, income tax shall be defined to include, but not be limited to, any tax based in whole or in part on the entity's net income, net profits, or gross profits; provided, however, that the term income tax shall not include any tax based on the entity's net worth, capital, or asset values, and shall not include any tax for which an exclusion or deduction is claimed in the calculation of taxable income reported on the Alabama income tax return.

(2) In case the amount of income tax actually paid by or on behalf of an individual resident of Alabama, or by one of the entities described in subdivision (a)(1) above, to another state or territory is in excess of the amount of tax that would be due on the same income computed using the applicable Alabama income tax rates, then only such amount as would be due in this state on such taxable income shall be allowed as a credit. In no event shall the credit for income taxes paid to another state or territory exceed the amount of tax that would be due on the same taxable income computed using the applicable Alabama income tax rates.

(3) As a further limitation, the credit for taxes paid to another state or territory shall only be utilized against that portion of a taxpayer’s Alabama income tax liability that is attributable to income from other states or territories to which income taxes were paid with respect to that tax year, which shall be determined by multiplying the taxpayer’s Alabama income tax liability before consideration of any credit described in subdivision (a)(1) by a fraction, the numerator of which is the taxpayer’s Alabama adjusted gross income attributable to other states or territories to which income taxes or the equivalent thereof were paid by or on behalf of an individual resident of Alabama, or by one of the entities described in subdivision (a)(1), and the denominator of which is total Alabama adjusted gross income.

(3) (4) If the amount of income tax actually paid by or on behalf of an individual resident of Alabama to any other state or territory on account of business transacted or property held is less than the amount of tax that would be due, as computed using the applicable Alabama income tax rates, then the income tax levied herein shall be computed on the entire taxable income from sources from both within and outside the state as defined herein, and the tax shall be paid less the credit allowed in this section for tax paid on income derived, directly or indirectly, from outside the state.

(4) (5) Before a resident of Alabama may claim the credit allowed under this subsection (a), he or she shall file with his or her Alabama income tax return a certificate showing the amount of gross and net income derived, directly or indirectly, from sources outside this state, together with the amount of tax paid or to be paid on such income.

(b) Any taxpayer described in Section 40-18-2(1) or Section 40-18-2(6), who, during any year, has been assessed a job development fee as described in Section 41-10-44.8(b), shall be allowed a credit against the amount of income tax due under the provisions of this chapter in such year in an amount equal to the job development fee withheld from the taxpayer's wages during the year.

(c)(1) A resident individual taxpayer, who is either a partner or member of a Subchapter K entity, a shareholder of an Alabama S corporation, or a beneficiary of an estate or trust, during all or part of a year, shall be allowed a credit equal to fifty percent (50%) of his or her proportionate share of the income taxes paid or accrued, including a payment recognized by 26 U.S.C. §901, to a foreign country with respect to the trade or business or investment income of such business, including related operations and affiliates.

(2) Notwithstanding the foregoing, the credit allowed in this subsection shall not exceed the amount of income tax that would otherwise be imposed by Alabama on the individual's income derived from the foreign country."

Section 2

Timely filed petitions for refund of overpaid income tax for the 2013 through 2017 tax years shall be granted, as otherwise appropriate, without consideration of the additional limitation provided in Section 40-18-21(a)(3) of this act or the limitation contained in the version of Ala. Admin. Code r. 810-3-21-.03 as of the effective date of this act; provided, however, that refund petitions for overpayment of income tax paid for tax years prior to 2017 related to the credit for taxes paid to other states or territories must be filed with the department by the earlier of (1) the expiration of the period in which to file refund petitions set forth in section 40-2A-7, or (2) Saturday, June 30, 2018. No adjustments included in or portions of any preliminary assessment or final assessment, or proposed adjustments or portions of proposed adjustments of income tax attributable to the application of the additional limitation provided in Section 40-18-21(a)(3) of this act or the limitation contained in the version of Ala. Admin. Code r. 810-3-21-.03 as of the effective date of this act may be entered or issued with respect to tax years ending on or before December 31, 2017, and any such assessment, adjustment, or portion thereof entered in violation of this provision shall be void and unenforceable and shall promptly be withdrawn, revised, or dismissed with prejudice by the department.

Section 3

The provisions of this act are severable. If any part of this act is declared invalid or unconstitutional, that declaration shall not affect the part which remains.

Section 4

All laws or parts of laws which conflict with this act are repealed.

Section 5

The department may promulgate rules to assist with the administration of this act.

Section 6

This act shall become effective for tax years beginning on or after January 1, 2018.