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Legislation to untax Rescue Plan relief may have to wait

By MARY SELL, Alabama Daily News

Legislation is needed to ensure Alabama families and restaurant owners aren’t penalized on their state income taxes for credits and grants they receive under the federal American Rescue Plan Act.

But with one day left in this year’s regular legislative session, a proposed bill on the matter isn’t likely to pass. That means it will probably have to wait until later in the year.

The $1.9 trillion federal rescue plan’s enhanced child tax credit, earned income tax credit and child and dependent care tax credit will be worth about $1.7 billion to Alabama taxpayers and payments will begin this summer, Sen. Dan Roberts, R-Mountain Brook, said.

If lawmakers don’t act, Alabamians could be taxed a combined $87 million in state income taxes, he said.

“This is $87 million of federal aid which is meant to help the families,” he said recently on the Senate floor, urging passage of his Senate Bill 379.

Similarly, Roberts said Alabama restaurants are expected to receive about $426 million in grants.

“If the bill is not passed in this legislative session, restaurants would need to withhold as much as $21 million from those grants to cover Alabama income tax on them because they’d be considered gross income,” Roberts said.

The bill clarifies tax code to ensure the family tax credit and restaurant grants don’t raise the state income tax liability for Alabamians.

Roberts filed the bill in early April and argued for passage this session. Similar legislation was needed earlier this year to prevent the state from collecting taxes on stimulus funds from the 2020 CARES Act.

“Letting Alabamians know today that it’s not taxable makes perfect sense,” Roberts said. “Businesses have had enough challenges, why make them guess if it’s going to be taxable or not.”

The bill got a committee vote, but hasn’t made it to the Senate floor.

Co-sponsor Sen. Arthur Orr, R-Decatur, said the prevailing thought in the Legislature is that lawmakers can deal with the bill in a special session later in the year. At least one is expected for required redrawing of legislative and congressional districts based on the 2020 census numbers. Other specials are possible.

“The thinking was that we can take it up in the reapportionment special session,” Orr said. “And at that time, we’ll have more federal guidance on it.”

He also said there could be more legislation needed on the federal money.

“It just seemed like a good idea to wait and get more information,” Orr said.

Another provision in the bill would allow corporations and banks an extra 30 days to file their Alabama tax return, after the due date of their federal return, said Bruce Ely, a partner at the Birmingham-based Bradley Arant law firm who specializes in tax law. Ely helped write the bill.

“That helps both the companies and their CPA firms, especially those companies doing business in multiple states and with the different ways each state has responded to all these federal stimulus bills,” Ely told ADN.

Ely argued the bill should have been passed as soon as possible.

“Millions of Alabamians will claim one or more of the three federal tax credits listed in SB 379, and because of that, their Alabama income tax will increase as a result of a reduced federal tax deduction,” Ely said. “And these are the folks who need financial assistance the most. This will be an unpleasant surprise.

“I commend Senators Roberts and Orr for their leadership on these exemption conformity bills and hope the House and Senate leadership will give the successor to SB 379 a high priority in the special session this Fall. It should be made retroactive to January 1, 2021,” Ely said.

Other co-sponsors on the bill are Sens. Garlan Gudger, R-Cullman, and Chris Elliott, R-Daphne.

Lawmakers earlier this year tweaked state code to ensure Alabamians didn’t have to pay state income taxes on federal funds received from Congress’ relief COVID-19 relief packages in 2020.

Asked about the need for similar action on the Rescue Plan money, Gov. Kay Ivey’s office referred questions to the Alabama Department of Revenue.

“The expanded federal tax credit provided under the American Rescue Plan potentially could affect the calculation of Alabama taxable income because it could change the federal tax deduction available to Alabama taxpayers,” an emailed statement from the department to ADN said. “Depending on income level and deductions, some taxpayers may not see an actual change in Alabama taxable income, but others may. Each family’s tax situation is different, depending on the type of income and the various credits available. We can’t say that there is any across-the-board category in which there is no effect of the expanded child tax credit on a taxpayer’s Alabama tax liability.”

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