Wednesday, May 16, 2018
STATE TAXPAYERS BE WARNED
State-level politicians, especially those in states with high income and property taxes, have been obsessing on the affect the limitation of the itemized deduction for taxes will have on the federal returns of residents, and proposing and legislating ridiculous and unworkable ways to try to help residents “get around” the limitation.
Instead they should be focusing on revising their individual state income tax laws so that residents do not see a substantively increased state tax bill next filing season.
Most states with income taxes follow the federal return – except at least my former home state of New Jersey and my current home state of Pennsylvania, which have created unique state tax systems. A taxpayer who itemizes on his federal return can claim the same itemized deductions on the state return, with an adjustment for the deduction of state income taxes. If you claim the Standard Deduction on the federal return you must also claim the state Standard Deduction.
The federal Standard Deduction has increased substantially – but unless the state legislature makes revisions the individual state Standard Deductions do not. And less allowable itemized deductions on the federal return “trickle down” to less allowable itemized deductions on the state return. While states do not generally allow a deduction for state and local income tax, they do allow a deduction, usually in full, for local property taxes. On the federal level a reduction of tax rates makes up for the loss or limitation of deductions in most cases. But the states have not reduced their income tax rates.
Some states have their own personal exemption deductions, while other states begin the taxation of income with federal net taxable income, after the deduction for personal exemptions. On the federal level the personal exemption deduction is gone.
Unless the legislatures in states that follow the federal income tax return make changes to their income tax law many taxpayers will get a big surprise when preparing their 2018 state income tax return. Especially since these states have not revised their withholding tables to reflect the increase in taxable income resulting from the GOP Tax Act federal changes.
Methinks that states will do nothing, and gleefully, at least in private, accept the increased income tax revenues from residents – blaming the federal government on the increase. After all, the state legislatures have not increased taxes – the increase is a result of federal legislation.
So, taxpayers be advised – you may pay less federal income tax for 2018 and beyond, but you will very likely pay more in state income tax!