When the government issues a tax credit, refund or some other kind of financial incentive, that should mean something, right? We’ve seen all kinds of initiatives designed to help taxpayers, both business and individual over the past few years.
But here’s something you may not know. In many cases, those tax breaks are offset partially or completely at the state level.
Back in 2001, President Bush introduced the famous Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). That’s the one that began a gradual reduction of the top 3 income tax rates, created a new 10% tax rate bracket, squared up the marriage penalty, and began a gradual increase in the estate tax exemption amount. It also reset the AMT boundaries, amongst other things.
Prior to 2001, most states went along with federal tax changes, automatically conforming to whatever went on at the top. However, when EGTRRA was introduced, states began to decouple from federal legislation, afraid that they would lose too much money by giving up all those taxes. That leads us to today, where we’ve got all sorts of federal breaks that are disallowed at the state level.
Take the Net Operating Loss carry back, for example. This was introduced in 2002 (and tweaked in 2009) and allows businesses with losses to carry those losses back by up to 5 years. By amending tax returns to apply current losses to historical profits, businesses can get back a lot of previously-paid taxes. In many cases it can lead to a significant tax refund.
It’s great for business owners, but lousy for states. The NOL was probably the first major instance of mass decoupling. Today it’s easier to name the states that permit an NOL than name those who don’t. Alaska, Delaware, Michigan, Missouri, New York, Ohio, and Oklahoma correspond to federal laws. Everyone else tweaked, disallowed or modified the federal laws.
In most cases that translated into no look backs, but a carry forward instead. However, even that wasn’t always the same. Federal law permits a 20-year carry forward period, whereas many states have a much shorter lifespan.
Another big split happened with the estate tax. Again, under EGTRRA this was changed, with the amount of the non-taxable exemption increasing, and the tax rate decreasing. Some 33 states enacted laws to preserve the income they received from estate tax at pre-existing rates, rather than go along with federal changes.
The bonus depreciation that came into place in 2004, and was brought back for the 2008 and 2009 tax years was another one. Again, 33 states opted out of giving taxpayers the same break at the state level. States taking a pass included: Arkansas, Arizona, California, Connecticut, Idaho, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Maryland, Massachusetts, Minnesota, Mississippi Missouri (for one year), Nebraska, New Hampshire, New Jersey, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas Vermont (for corporate income tax filers only), Virginia, Wisconsin, and D.C.
Most of those same states also decoupled from the increased Section 179 deduction limits, or in some cases, altogether. For years California did not allow a state level S. 179 deduction. It’s not allowed in Florida, either. New York and New Jersey both tweaked it (SUVs are not deductible)
Now, with our collapsed housing market and unhealthy economy, the focus has turned to debt discharge. Again, it varies from state to state.
The following states either limit or prohibit you from avoiding tax on the forgiven debt from your personal income under IRC 108(a): OH, CT, DC, FL, GA, IN, MA, MN, MD, NM, NJ, OK and RI.
Where corporate debt forgiveness is concerned, far more states have opted out of forgiving the the tax on the debt forgiveness, in whole or in part: AZ, AR, CA, CT, FL, GA, HI, IN, IA, KY, ME, MD, MA, MI, MN, NH, NJ, NC, OH, OR, RI, SC, VT, VA, WI
If you’re confused, don’t fret. You’ve got plenty of company. Your best bet is to find a good tax preparer who can help you navigate the maze. And if you need a good tax preparer, email Richard@USTaxAid.com for more information.