Tax burden lighter, but should more be done?

BIG PLANS: Attorney John M. Harpootian of Paster & Harpootian Ltd., meets with associate attorney Jennifer Klein Ericsson. Harpootian specializes in personal and financial planning, and trust and estate administration. / PBN PHOTO/MICHAEL SALERNO
BIG PLANS: Attorney John M. Harpootian of Paster & Harpootian Ltd., meets with associate attorney Jennifer Klein Ericsson. Harpootian specializes in personal and financial planning, and trust and estate administration. / PBN PHOTO/MICHAEL SALERNO

In the last few years the state has taken steps toward alleviating some of the financial pressures felt by retirees, but some tax professionals believe more could be done to prevent those in their twilight years from leaving the Ocean State.

Top concerns among retirees and those getting ready to retire include income and estate taxes, according to John M. Harpootian, principal of Cranston-based Paster & Harpootian Ltd., who specializes in personal and financial planning and trust and estate administration for high-net-worth clients.

The state has taken some action to lighten the burden on retirees, including a newly enacted law that increased the estate tax exemption from $921,655 to $1.5 million.

The changes could save retirees nearly $15 million a year compared with previous years, according to state estimates. But while it’s now higher than the Massachusetts threshold of $1 million, it’s still lower than Connecticut – $2 million – and the federal tax threshold, which next year will be $5.4 million.

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About 32 other states, including Florida and New Hampshire, have no estate tax. Harpootian says Florida is the most popular among his clients who’ve moved because it has no estate tax or income tax.

“Increasing [the exemption] to $1.5 million is a step in the right direction in trying to keep retirees here,” Harpootian said of the estate tax. “But no matter what it is in Rhode Island, it’s always going to be higher than zero.”

It’s difficult to determine exactly what effect the estate tax cut will have on the state’s revenue, but in one analysis done by Providence lawyer Anthony R. Mignanelli, partner of Mignanelli & Associates Ltd., the tax cut will save a number of people money.

Indeed, roughly 55 percent of the taxable estates filed in 2012 and 2013 were at or below the $1.5 million threshold, and Mignanelli is optimistic about the effect it’ll have on retirees.

“This … is a positive change for Rhode Island taxpayers and hopefully will influence a sufficient number of Rhode Islanders to maintain their residency in Rhode Island and not move to a state with no estate tax impact,” he wrote in his analysis.

“None of us like to think about dying,” said Rep. Robert E. Craven Sr., D-North Kingstown, who filed legislation that led to the higher estate tax exemption. “But when you sit down and look at it with an estate-planning lawyer and you see the numbers projected for your estate, those become real numbers. People say, ‘I can’t afford this. I’d like to leave something for the kids and grandchildren.’ ”

The estimated lost revenue to the state of approximately $15 million represents about 0.5 percent of total revenue in the fiscal 2016 budget. But the hole would largely be filled by projected increases in the state’s income tax, which is estimated to grow about 3 percent each year until 2020.

Revenue loss to the state from the estate tax cut is also balanced, he adds, by the money people spend locally while living and working in Rhode Island.

“That revenue goes with them for the rest of their lives,” he said.

The income tax is another area of strain on retirees in Rhode Island, says Mignanelli.

“Is there still an exodus because of the income tax?” Mignanelli asked rhetorically. “I would say ‘yes.’ ”

In January, Craven introduced another piece of legislation that would cut some income taxes for retirees. He was successful in getting 42 of the 75 House members to co-sponsor the bill. But only a portion of it ended up getting folded into the state budget – allowing exemptions from paying tax on Social Security retirement benefits for individuals making up to $80,000 and $100,000 in a joint filing.

“It was a great start down a path to solve a problem, which is retaining retirees with disposable income,” Craven said.

He’s considering reintroducing next year proposed income tax exemptions on all state, local and federal retirement income, along with military pensions paid to those 65 and older.

Outsiders still see the Rhode Island tax code as too harsh. Kiplinger’s, a Washington, D.C.,-based finance magazine, recently released a report citing Rhode Island as the sixth-worst state in the country when it comes to taxes and one of the worst for retirees.

Harpootian believes the state could benefit from following New York’s lead in slowly increasing the estate tax exemption to match the federal level, but says that wouldn’t solve the income tax concerns.

“Without making major adjustments in the budget it’s difficult [to curb taxes], but it’s a challenge the legislature needs to meet, Harpootian said.

Rhode Island “needs to be competitive,” he added. •

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