StructuredSales.org
StructuredSales.org
Alabama's individual income tax has been stuck at a constitutional ceiling of 5% for generations. Amendment 25, ratified in 1933, is why a Tuscaloosa machine-shop owner and a Wilcox County timber seller do not face an 8% or 10% state bracket when they exit. There is no long-term capital-gains preference underneath that ceiling. What Alabama has instead, and what most installment illustrations from national sites leave out, is a deduction for federal income tax. Amendment 225 put it in the constitution. The Form 40 worksheet still carries it, and it includes the 3.8% federal net investment income tax.
That deduction runs backward through any plan to spread a gain. The reason to use a structured installment sale is often a smaller federal bill. A smaller federal bill is a smaller Alabama deduction. Alabama tax can rise a little while the combined bill falls. Anyone who quotes "5% either way" has skipped the only Alabama-specific interaction that changes the answer.
The Department of Revenue publishes the same schedule year after year, because the constitution does not give the legislature room above 5%. Joint filers pay 2% on the first $1,000 of taxable income, 4% on the next $5,000, and 5% above $6,000. Single filers, heads of family, and married persons filing separately pay 2% on the first $500, 4% on the next $2,500, and 5% above $3,000. The gap between "all at 5%" and the actual table, on a joint return, is $80. On a seven-figure gain it is noise. Restarting those tiny brackets with an installment sale is not a strategy.
Residents deduct federal income tax paid or accrued, net of refundable credits. The current worksheet starts with Form 1040 income tax, adds Form 8960 net investment income tax, and subtracts refundable credits. Federal tax saved is Alabama deduction lost.
Alabama taxable income is not federal taxable income. The state has its own standard deduction, which phases down as income rises, its own personal exemptions (the constitution sets minimums of $1,500 single and $3,000 joint), and a list of subtractions that includes, since January 1, 2025, net capital gain on precious-metal bullion. Bullion is coins, bars, or rounds of primarily refined gold, silver, platinum, or palladium valued by weight and purity. A timber deed, a plant, or an apartment house is not bullion. Profits from sales of real estate, stocks, and bonds are listed in the instructions as income unless a specific exemption applies.
There was no 2026 mid-year rate cut of the kind Georgia and South Carolina enacted. A payment collected in 2028 is still aimed at a 5% ceiling unless the constitution changes. Timing does not buy a lower Alabama rate. It buys a different federal deduction and a different federal bracket.
Alabama taxes residents on income from every source and nonresidents on Alabama-source income. Real property in the state is the clearest Alabama source. A seller who uses the federal installment method reports gain as principal is collected. The Alabama return follows that recognized gain into the year it is included, then subtracts the federal income tax deduction for a resident. The deduction is the year's federal tax, not a fictional "tax on the Alabama slice only," and the cash-versus-accrual timing of the deduction follows the method used to compute taxable income. Refundable credits reduce it. The estimate below sets those credits at zero.
Moving to Florida or Tennessee after closing removes those states from the picture, because they do not tax the income. It does not re-source gain on Alabama land. A nonresident files on Alabama-source income, and the resident federal-tax deduction illustrated here should not be copied onto a Form 40NR without reading that form. Depreciation recapture under § 1245 is recognized in the year of sale for federal purposes and is ordinary. It does not wait for later installment checks. Related-party rules in § 453(e) and § 453(g) can accelerate gain or deny installment treatment on depreciable property sold to a related buyer. Those are federal rules Alabama income will reflect when the federal number moves.
The I-20 and I-65 corridors are full of closely held suppliers — machine shops, stampers, and logistics yards selling to the auto plants in Tuscaloosa, Montgomery, and Huntsville. The buyer's purchase-price allocation is the return. Equipment that has been fully written off produces recapture taxed in the closing year. Personal goodwill, when the facts support it, is capital gain and is the piece an installment schedule can spread. A covenant not to compete is often ordinary. How a business sale is taxed walks through that split; Alabama then runs the federal tax through the deduction worksheet before it applies 5%.
South Alabama timber and Black Belt cropland are the other large gains. Basis may be a decades-old purchase or a step-up from an inheritance. The farmland sale sequence — allocate the price, pay recapture on equipment at closing, put the land on Form 6252 — is the working method. Alabama has no retired-farmer exclusion comparable to Iowa's. Poultry complexes on Sand Mountain add houses and equipment with heavy depreciation, so the ordinary-income piece at closing can dwarf the land gain. Owners comparing a replacement tract with a stream of payments should read 1031 versus an installment sale on farmland before they lock the contract. Gulf Coast rental houses raise the same tired-landlord question as anywhere else, with Alabama-source rent and gain both in the state base while the owner is a resident; installment sales of real estate covers the federal depreciation layers.
This estimate isolates $1,000,000 of long-term capital gain allocated to personal goodwill, basis zero, for a married couple who also have $232,200 of other adjusted gross income. After the 2026 standard deduction of $32,200, other taxable income is $200,000. The goodwill is collected either at closing or as $125,000 of gain in each of eight years (gross-profit percentage of 100% on that slice). Equipment recapture is assumed to be a separate, year-of-sale ordinary amount and is not in the table. Interest on installment payments is omitted. The contract is under $5 million, so the § 453A interest charge is not applied. Federal long-term brackets are the 2026 figures: 15% through $613,700 of taxable income and 20% above, with the 0% band already used by the other income. The 3.8% net investment income tax uses the $250,000 joint threshold.
Lump-sum federal tax on the gain is $179,315 of long-term tax ($413,700 at 15% and $586,300 at 20%) plus $37,324 of net investment income tax, $216,639 together. Each installment year taxes $125,000 at 15% ($18,750) plus about $4,074 of net investment income tax. Over eight years the federal tax on the gain is $182,589. Federal tax falls by about $34,050.
The Alabama estimate applies 5% to the gain minus that federal tax on the gain. It ignores the 2% and 4% brackets (worth at most $80 on a joint return), exemptions, and the standard-deduction phaseout. It treats the entire incremental federal tax as deductible, which matches the resident worksheet's inclusion of Form 1040 tax and Form 8960, and it assumes no refundable credits.
| Tax on the $1 million goodwill gain | Lump sum | Eight-year total |
|---|---|---|
| Federal tax, long-term gain plus 3.8% NIIT | $216,639 | $182,589 |
| Alabama estimate at 5% after the federal-tax deduction | $39,168 | $40,871 |
| Combined | $255,807 | $223,460 |
Alabama tax is about $1,703 higher on the installment path, because the deduction shrank when the federal tax shrank. The combined estimate is still about $32,347 lower. That is the honest Alabama result: the state does not hand you a bracket win, and the federal-tax deduction claws back a thin slice of the federal savings. Sellers who only look at the Alabama column will talk themselves out of a schedule that still reduces the total. Sellers who only look at the federal column will overstate the savings by that $1,703 in this particular set of assumptions. Change the other income, the basis, or the credits and both columns move. Installment tax treatment is the federal reporting map your preparer will actually file.
No. Capital gain is ordinary income. For a joint return the rates are 2% on the first $1,000 of taxable income, 4% on the next $5,000, and 5% on taxable income over $6,000. Single filers reach 5% above $3,000. The Alabama Constitution caps the individual income tax at 5%. On any sale large enough to plan around, essentially all of the gain is in the 5% bracket.
Residents may deduct federal income tax paid or accrued, after refundable credits. The Alabama worksheet adds regular federal income tax and the net investment income tax from Form 8960, then subtracts refundable credits. A larger federal bill produces a larger Alabama deduction. Paying less federal tax, which is what bracket management is for, can therefore raise Alabama taxable income.
It can. If spreading the gain drops part of it out of the 20% federal bracket and reduces the 3.8% net investment income tax, the federal deduction on the Alabama return shrinks. Alabama tax at 5% of a slightly larger base can go up by less than the federal tax goes down. The combined bill is the number that matters, and it has to be computed, not assumed.
Alabama taxes residents on taxable income from all sources and nonresidents on Alabama-source income. Gain from Alabama real property is Alabama-source income. Collecting installment principal after a move does not, by itself, re-source that real-property gain. Federal income tax is deductible by residents; a nonresident's Alabama computation is limited to Alabama-source items and should be run on Form 40NR rather than by borrowing the resident illustration.
Beginning January 1, 2025, Alabama's instructions exclude net capital gain on the exchange of precious-metal bullion, meaning coins, bars, or rounds of primarily refined gold, silver, platinum, or palladium marked and valued by weight and purity. That exclusion does not apply to a business, a timber tract, or a building. Those sales remain in the ordinary 5% computation.
Last reviewed: October 22, 2026.
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