Alabama State House building
Source: Wikimedia Commons

Alabama COVID Tax Bill Aims to Exempt COVID-19 Tax Credits

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Feb. 17 2022, Published 10:53 a.m. ET

Citizens of Alabama might be eligible to pay less in state taxes after an Alabama House vote brought a bill one step closer to becoming law. The legislation would remove Alabama state tax obligations from COVID-19 related relief funds. The Alabama COVID tax bill passed in the state House of Representatives this week.

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The Alabama House voted unanimously, 99-0, to pass the bill exempting certain federal benefits received through the American Rescue Plan Act from state taxes. Although the legislation still isn't officially law, the governor could sign it into law in the coming days. Taxpayers who already filed their 2021 taxes will need to file an amended return to benefit from the exemption.

Janet Yellen
Source: Getty

Janet Yellen also spoke at the February event about Child Tax Credits and Earned Income Tax Credits, which will be exempt from taxation in Alabama if the bill passes.

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Alabama taxpayers could save $87.7 million in state taxes if the bill gets approved.

Senator Dan Roberts, who sponsored the Senate version of the bill, said that Alabama residents likely received about $2 billion from the three enhanced ARPA (American Rescue Plan Act) tax credits. He estimated that would mean saving $87.7 million in state income taxes.

The tax exemption, if the bill goes through, will mean Alabama residents won’t pay state income tax on enhanced federal child tax credits, earned income tax credits, and dependent care tax credits. The ARPA was meant to help families cope with various financial struggles caused by the COVID-19 pandemic.

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Representative Jim Carns stated that Congress intended for all pandemic-related tax credits to be exempt from both federal and state taxes. However, Alabama and Louisiana didn't have the automatic exemption built-in.

Sen. Dan Roberts
Source: Dan Roberts for Alabama Facebook

State Sen. Dan Roberts sponsored the bill to exempt COVID relief from state taxation.

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The COVID tax bill has passed in the Alabama Senate and House.

Slightly different versions of the bill exempting COVID relief funds from state taxation have passed. The Alabama Senate passed its form of the bill earlier in the month. On Feb. 15, the state House also passed with a 99-0 vote in favor of the measure.

Some legislators didn't criticize the bill itself, but the timing of the legislative action. For example, Rep. Arnold Mooney of Birmingham said the bill should have been addressed and passed during a special session in January that related to ARPA funding, AL.com reported.

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Both Mooney and Rep. Mary Moore, the Democratic representative from Birmingham, questioned how taxpayers will be notified of the change. In particular, the change will impact people who have already filed their state taxes. They will have to file an amended return to reduce their tax liability.

A similar tax exemption passed in Alabama last year.

In February 2021, a similar type of legislation was signed into law to keep Alabama households from paying taxes on federal COVID-19 relief. Senator Roberts also sponsored that bill.

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This year, Senator Roberts said, “If we do not pass this bill, then we are choosing to impose an extra $87.7 million in taxes on hardworking Alabamians who qualified for tax relief because they showed up for work during the pandemic.”

Since the bill was made into law last year, and the House voted unanimously this time around for its passage, the bill's prospects of passage into law this year seem good.

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