State tax on Making Work Pay

[Earl]

Noticed that State of Alabama has changed the way they allow a deduction for Federal Income Taxes paid. In the past the tax amount on return before applying the refundable credits was the amount allowed as deduction.

This year the amount allowed as a deduction is the total tax less the refundable credits (making work pay, EIC, Education, Homeowner). Basically what this does is make these credits taxable in a back door way.

Guess when state runs short of money they will find ways to make it up. However, this is not even a fair way to tax these amounts. The $250 received by social security recipients is not shown on the tax return in any way (only used to offset credit) but the working person has to show the $400 on the return an pays tax on it.

[DaveO]

I'm still trying to get over the fact Alabama has a deduction for federal taxes paid. I think Washngton does too. The closest we have to that is a rule that if your federal liability is less than your state liability you can reduce your state liability to match federal.

Pretty cool trick for retirees who had a bunch of capital gains from selling stock or property and otherwise didn't have taxable income. While NE taxes Cap gains the same as ordinary income the "check the box" rule could eliminate the state liability.

[ChEAr$]

I'm still trying to get over the fact Alabama has a deduction for federal taxes paid. I think Washngton does too. The closest we have to that is a rule that if your federal liability is less than your state liability you can reduce your state liability to match federal.
.

Thanks to Earl for the tip.

As to deductibility of federal income taxes Dave, it's in the constitution of the state, so
in order to get rid of it, the people would have to vote it out. If it came to such a referendum, the rich would vote no, and the poor people who don't pay tax couldn't care less.

[Gretel]

Montana has a deduction for Federal income tax as well but a very low standard deductions. That has the effect that almost everyone who pays federal income tax at all has to itemize. Some years ago the limited the deduction for Federal income tax to $5,000/10,000 and lowered the tax rate a little bit. With $15,400 taxable income you end up at the highest tax rate.