Yes. It’s true. This is not April’s Fools.
What? Didn’t I just breathe a sigh of relief because the sales tax was not expanded dramatically? Yes. But, I am talking about income taxes – and what happened last year that is already affecting you.
Specifically, in 2010 the state legislature quietly overhauled Rhode Island’s income tax structure. Rates – especially the top rates – were “flattened.” The stated goal was to make RI competitive with other nearby states for high income taxpayers. Top rates dropped from almost 10 percent to less than 6 percent.
BUT – mindful of the budget, this overhaul was “revenue neutral.” What does this mean, Senator. The total tax dollars collected because of the bill cannot change. For every tax cut dollar there is a corresponding increase of a buck. If my taxes dropped a thousand, great. One of my neighbor's taxes went up the same amount. So sorry – especially if I am the neighbor.
How did my (neighbor’s) taxes go up if rates were flattened? Quite simple – you know those “itemized deductions” homeowners generally take for mortgage interest, property taxes, donations and the like? Through 2010 your Rhode Island deduction was based on your federal “itemized deductions.” No more! Your Rhode Island itemized deductions have now been flattened – or eliminated. Singles get $7,500; marrieds are $15,000. After $175,000 that amount decreases. Over $195,000? Zero. Yes.
Okay, I just want to know: did my taxes go up, down or across? Am I a winner or a loser?
Answer – Depends on the (complex) interplay of two factors – your tax bracket and your deductions. Are you high income with low home ownership costs? Probably a winner. Are you middle or low income with a costly mortgage? Could be a loser. Here are some case studies. Maybe you will find yourself.
Sandy is single. Last year she paid $1,280 in RI taxes on her $57,000 income. For 2011 she will pay $500 more.
Or you could be Stan. His income is a bit higher, $75,000. Single dad owns a home and raises a child. His taxes are going up $800, over 60%. He has high homeownership costs and pays for a house for mom. Loses almost $20,000 of deductions
Marianne and Alex’s income is a bit over $100,000. More importantly, however, they own and live in a two family, so their rental portion already absorbs half of their deductions. Result: tax decrease of 54%.
Now let’s look at Peter and Pam. Homeowners with income of $160,000. He is employed as a traveling salesman with substantial costs – gas, gifts – that he itemizes on the return. No more. Tax increase of $400.
Sam and Samantha earn $175,000 and have no children. They rent. Their 2010 state income tax was nearly $9,500. This year that will drop to about $7,500, or 25%. Nice! Why? Their tax rate dropped, and the flattening of deductions did not hurt them. They are not homeowners and the new “flat deduction” is actually a benefit for them.
You do not want to be Larry and Laura. Two kids and total wages of about $190,000. In 2007 they purchased a second home, and they give generously to charity.
Larry and Laura paid $6,300 in state taxes for 2010. This year they will be on the hook for – gulp – more than $8,500. A $2,200 increase, or 35%. Why? Their deductions dropped from $55,000 to $6,000. That more than offset the drop in rates. So they lose – big time.
William earned over $300,000 last year and paid nearly $20,000 in state taxes. That bill will go down about $3,500 or 18%. Why? he drop in the tax rate far exceeded his loss of deductions.
Still confused? I can’t blame you. The state as a whole comes out even. Individually it is hard to predict how we will fare. Maybe that’s why our legislature made such little noise about it.
NOTE: Eery situation is different and federal and state tax laws are subject to change. This article is presented exclusively for informational purposes and is not intended to substitute for obtaining tax or financial advice from a tax or other business professional.
The tax projections are derived from actual examples; names and related details are fictional, and numbers rounded for readability.
Rich Streitfeld is a CPA with Aaronson Lavoie Streitfeld Diaz and Co. in Cranston, R.I. He can be reached at firstname.lastname@example.org or 401-223-0205. He authors a blog “Peace Love and Business Planning – Prosperity for the Rest of Us.” –www.peaceloveandbusinessplanning.com.