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Differences Between Alabama and Federal Gross Income

Although Alabama tax law mirrors the Federal Tax Code in many respects, there are also significant differences between the two systems. Some of the more common items of gross income that are treated differently are listed below:

Interest Income

Alabama excludes interest or dividend income from direct obligations of the United States Treasury. Schedule B of Form 40 calls for the U.S. Treasury interest to be reported; but in a separate "Exempt Interest" column that is not added to taxable income. The instructions make it clear that interest on obligations of quasi-governmental agencies such as the Federal National Mortgage Association (FNMA), or the Government National Mortgage Association (GNMA) is not interest on a direct obligation of the U.S. Government, and must be included in Alabama taxable income.

On the other hand, interest on municipal obligations from municipalities or agencies outside of Alabama is taxable in Alabama. Interest on a DeKalb County, Georgia bond, for example, is exempt from Federal taxable income; but is taxable in Alabama.

Wages

Many Alabama taxpayers will find that the "State wages, tips, etc." listed in Box 16 of Form W-2 is greater than the corresponding Federal amount in Box 1. This difference is particularly common with public school employees and employees of the State of Alabama, and arises because contributions by those employees to the Retirement Systems of Alabama (RSA) are excluded from reported Federal wages; but are taxable in Alabama.

Capital Gains and Losses

Alabama law makes no distinction between capital gains or losses and other types of income. Because of this, the capital loss limitations and carryovers that complicate the computation of Federal taxable income simply do not apply to Alabama. Capital losses are deductible in full in the year in which they are incurred, and capital gains, regardless of the holding period, are not eligible for any special rate treatment on the Alabama return.

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Income and Loss from Passive Activities

There is no special treatment for income or losses from passive activities on Alabama returns, and no limitations on losses from such activities. An Alabama rental loss, for example, is deductible without limitation in the year when the loss occurs. Of course, this also means that in a later year, when the suspended federal loss is deducted against passive income, there is no such deduction available on the Alabama return.

Social Security Benefits

Alabama does not tax Social Security benefits or Railroad Retirement benefits. They are completely excluded from Alabama gross income, regardless of the taxpayer's income from other sources.

Pension Benefits

Benefits from traditional "defined benefit" pension plans are excluded from Alabama taxable income. The Department of Revenue identifies several such pension plans in the Instructions to Form 40. The list is not all-inclusive:

Alabama Teacher's Retirement SystemAlabama Employee's Retirement System
Alabama Judicial Retirement SystemCivil Service Retirement System
Retirement systems created by the Federal Social Security ActsRailroad retirement benefits
Military Retirement payTVA Pension System benefits
U.S. Foreign Service Retirement and Disability Fund AnnuitiesU.S. Government Retirement Fund
Retirement benefits received from any Alabama firefighting agency or police system by any eligible firefighter, peace officer, or designated beneficiaryAny IRC Section 414(j) "Defined Benefit" plan

Alabama Income Tax Refund

When a taxpayer receives a refund of Alabama taxes paid, he usually is required to include that refund in his Federal gross income in the year he receives it. Since Alabama taxes paid are never deductible on the Alabama return, the refund of those taxes is never required to be included in Alabama gross income. Also, refunds of Federal taxes paid are not included in gross income of either the Federal or the Alabama returns.


This page last modified 2/6/13


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