Credit for Taxes Paid in Other States

Alabama adopted the Multi-State Compact in 1977, and for the first twenty years of its operation, the Compact was applied to individuals as well as to business entities. For tax years beginning in 1997 and thereafter, however, an Alabama resident who has income of any kind that is taxed in another state must also include that income on his Alabama return and take a credit against Alabama tax for the taxes paid to the other state on that income. The amount of the credit is the lesser of

The income tax actually paid or accrued to the other state on the income in question, or
The income tax computed on that income using Alabama rates.

The credit does not apply to non-resident taxpayers, since their Alabama taxable income consists only of income earned in Alabama.

If a taxpayer has income in more than one other state in a taxable year, the credit must be determined for each state separately. Assume, for example, that an Alabama resident has income from Alabama, and also income from two other states, State X and State Y.

State	Income Earned	Tax Paid	Tax Using Alabama Rates	Credit Allowable
State X	$9,000	$500	$373	$373
State Y	$4,000	$60	$142	$60
Alabama	$23,000		$1,073

Note that the $23,000 taxable in Alabama includes the $13,000 earned in other states. The taxpayer will have net tax due to Alabama of $640, as shown below.

Total tax at Alabama rates	$1,073
Less credit from State X	($373)
Less credit from State Y	($60)

Net tax due to Alabama	$640
(Adapted from Alabama Regulation §810-3-21-.01)

The credit is allowed only on the Alabama return for the year in which the income is taxable in the other state, even though the tax is not paid to the other state until a later year. For example, if an Alabama resident taxpayer owes tax to the state of Georgia for the 2003 tax year, and pays that tax in 2004, the credit will appear on her 2003 Alabama return. For purposes of determining the Alabama tax liability, and for determining whether or not the underpayment penalty applies to the Alabama return, the credit is deemed to be a payment of tax to Alabama on the due date of the Alabama return.

An Alabama resident taxpayer claiming the credit for taxes paid to another state is required to attach a copy of the return for the other state to his Alabama return. The other state tax return must show the amount of taxes paid to that state.

This page last updated 2/7/04

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