(1) The credit for tax paid or incurred to
other jurisdictions shall not be used to offset that portion of a taxpayer's
income tax liability which is attributable to Alabama sources. The credit for
tax paid or incurred to other jurisdictions shall only be utilized against that
portion of the taxpayer's income tax liability which is attributable to income
from other jurisdictions.
(2) As a
general rule, that portion of a taxpayer's income tax liability which is
attributable to non-Alabama sources shall be determined by multiplying the
taxpayer's Alabama income tax liability before consideration of any credit
described in
Code of Ala. 1975, §
40-18-21 by a fraction, the
numerator of which is total non-Alabama source adjusted gross income and the
denominator of which is total Alabama adjusted gross income.
(a) Example. Taxpayer reports $120,000 of
adjusted gross income on his Alabama income tax return, of which $80,000 is
attributable to another jurisdiction; his Alabama income tax liability before
credits is $4,000. Taxpayer paid the other jurisdiction $4,000 of income tax on
the $80,000 of income from the other jurisdiction.
Because one-third ($1,333) of Taxpayer's liability is
attributable to Alabama sources, it is not subject to the credit for tax paid
to other jurisdictions. The maximum credit that Taxpayer may utilize is $2,667,
which is the portion of his liability attributable to other
jurisdictions.
(b) Example.
Taxpayer reports $120,000 of adjusted gross income on his Alabama income tax
return, of which $80,000 is from non-Alabama sources. Of this $80,000
non-Alabama source income, $40,000 is attributable to State A and $40,000 is
attributable to State B. Taxpayer's Alabama income tax liability before credit
is $4,000. Taxpayer paid State A $2,000 of income tax on the $40,000 of income
from State A; Taxpayer paid State B no income tax on the $40,000 of income from
State B.
Because one-third ($1,333) of Taxpayer's liability is
attributable to Alabama sources, it is not subject to the credit for tax paid
to other jurisdictions; Taxpayer's remaining income tax liability of $2,667 is
creditable. However, because the total of income tax paid by Taxpayer to both
States A and B ($2,000) is less than the creditable portion of Taxpayer's
income tax liability ($2,667), the maximum credit for tax paid to other
jurisdictions does not limit Taxpayer's use of the credit.
(3) As an exception to the general
rule described in (2), taxpayers with foreign (non U.S.) source income and
federal foreign tax credits may use the following alternative methodology to
determine the portion of the Alabama income tax liability attributable to
Alabama and non-Alabama sources. The taxpayer may multiply Alabama source
income by his or her effective Alabama income tax rate to determine the portion
of his or her liability attributable to Alabama and therefore not creditable.
For purposes of this calculation: the taxpayer's effective Alabama income tax
rate equals the statutory rate of five percent (5%) multiplied by one (1) minus
the taxpayer's effective federal income tax rate; the taxpayer's effective
federal income tax rate equals the taxpayer's federal income tax liability
before foreign tax credit divided by his or her federal taxable income; and
Alabama source income equals total Alabama adjusted gross income less income
attributable to non-Alabama sources.
(a)
Example. Taxpayer reports $200,000 of adjusted gross income on his Alabama
income tax return, of which $30,000 is attributable to a foreign (non-U.S.)
jurisdiction; his Alabama income tax liability before credit is $8,500.
Taxpayer's federal taxable income is also $200,000; his federal income tax
liability before subtracting any foreign tax credit is $40,000. Taxpayer paid
the foreign jurisdiction $10,000 of income tax.
In determining the overall limit on the credit available for
taxes paid to other jurisdictions, Taxpayer multiplies his Alabama source
income of $170,000 by his effective Alabama income tax rate. Taxpayer
determines the effective Alabama income tax rate by multiplying the five
percent (5%) statutory Alabama income tax rate by one minus his or her
effective federal income tax rate. His effective federal income tax rate before
foreign tax credit is twenty percent (20%) or ($40,000 / $200,000) and his
Alabama effective tax rate is four percent (4%) or (5% x (1-20%) or 80%).
Taxpayer then multiplies his Alabama source income ($170,000) by his effective
Alabama income tax rate (4%), which equals $6,800. The credit for tax paid to
other jurisdictions cannot be used to reduce Taxpayer's liability below $6,800.
Taxpayer's credit for tax paid to other jurisdictions cannot exceed $1,700
($8,500 - $6,800).
(4) In addition to the methodologies
described above, the taxpayer may use an alternative methodology by obtaining
written approval from the Department before the original due date of the
taxpayer's income tax return.
(5)
This rule is applicable to tax years beginning on or after January 1,
2013.
Notes
Ala. Admin. Code
r. 810-3-21-.03
New Rule: Filed November
28, 2012, effective January 2, 2 013.
Author: Brandee B. Tickle, CPA
Statutory Authority:
Code of Ala.
1975, §§
40-2A-7(a)(5),
40-18-21.
