New Alabama law means federal COVID benefits won’t increase state income taxes

By Mike Cason

Alabama taxpayers won’t have to pay more in state income tax because of the increased federal child tax credits they received last year.

Gov. Kay Ivey signed into law a bill to shield the benefits that most families with children got under the American Rescue Plan Act (ARPA), passed by Congress in March 2021, from the state income tax.

ARPA, intended to help households and businesses with the costs of the COVID-19 pandemic, provided part of the increased credits as monthly payments of up to about $250 per child from July through December last year. ARPA also increased benefits from the earned income tax credit and dependent care tax credit.

In Alabama, without a change in state law, the federal benefits would lower the deduction for federal taxes paid that Alabama taxpayers use to reduce their state income tax.

The bill Ivey signed into law lets taxpayers disregard the increased tax credits when calculating their deduction for federal taxes paid.

“I am proud to sign this needed tax relief into law so that money will return directly into the hands of hardworking Alabamians,” Ivey said in a press release. “I commend the Alabama Legislature for their work on this and look forward to this benefitting Alabama families this tax season.”

What about for Alabama taxpayers who have already filed their taxes for 2021?

The Alabama Department of Revenue (ADOR) issued instructions for how those taxpayers can take advantage of the new law.

Taxpayers who filed their taxes electronically through a third-party vendor will not have to do anything to receive the benefit. The ADOR will automatically recalculate the federal income tax deduction for eligible taxpayers who electronically filed before the new law took effect.

Taxpayers who have already filed using the ADOR’s online portal My Alabama Taxes or who filed paper returns can amend their returns to take advantage of the deduction. The ADOR said that for now amended returns can only be submitted by filing a paper return. The ADOR plans to post a link to the updated instructions soon.

The new law should benefit many people.

ARPA increased the child tax credit for 2021 from $2,000 to $3,600 for children under age 6 and from $2,000 to $3,000 for children 6-17. From July through December, most families with children received up to about $250 per month for each child. Couples with adjusted gross incomes of up to $150,000 and single parents with incomes up to $75,000 received the full benefit.

According to an analysis by the Center on Budget and Policy Priorities, about 560,000 Alabama families with a total of about 930,000 children received monthly child tax credit payments. An overwhelming majority spent the money on basics such as food, clothing, rent, mortgage and utilities, the center’s analysis showed.

Sen. Dan Roberts, R-Mountain Brook, and Rep. Jim Carns, R-Vestavia Hills, sponsored the legislation.