As tax partner at Piccerelli, Gilstein & Co. LLP, Patricia A. Thompson has been fielding a lot of questions about the Rhode Island’s income tax overhaul, which cuts the state’s top marginal tax rate and reduces the number of tax brackets from five to three. We asked Thompson to answer five more questions.
PBN: Leaders in Rhode Island joined together to support legislation to improve Rhode Island’s personal income tax system effective Jan. 1, 2011. Why was this necessary?
THOMPSON: Rhode Island’s personal income tax system was identified as a barrier to bringing new business to and retaining existing businesses in Rhode Island. Business developers will no longer need to explain the highest 9.9 percent personal income tax rate. Even with the lower alternative flat tax rate, the focus from potential new businesses was the 9.9 percent rate. Reducing the top tax rate to 5.99 percent will be much better from a marketing perspective.
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PBN: How do the personal income tax changes affect an individual taxpayer?
THOMPSON: The new system is much simpler. Taxpayers will no longer have to calculate their tax liabilities three ways, once under the regular system using itemized or standard deductions and exemptions using the graduated tax brackets and rates, the alternative minimum tax, and the alternative flat tax. They now only have one tax calculation starting with federal adjusted gross income making a few modifications reducing it by a standard deduction, an exemption and applying the three tax brackets and rates then reduced a select number of credits. There is a slight complication in the phase out of the standard deduction and exemption when the Rhode Island adjusted gross income exceeds $175,000.
PBN: Will I still get the benefit of my charitable contributions, mortgage interest and real estate taxes?
THOMPSON: No. These itemized deductions as well as all other itemized deductions are replaced with a higher standard deduction. However, this higher standard deduction is eliminated once the Rhode Island adjusted gross income exceeds $175,000. It is not likely that taxpayers will change their charitable giving habits due to the loss of the Rhode Island tax deduction. The federal benefit will still be there. In addition, many high income taxpayers were already using the alternative flat tax that did not allow itemized deductions.
PBN: This new system sounds like the existing alternative flat tax. Is that correct?
THOMPSON: The new system is better than the existing alternative flat tax because it allows for a standard deduction and an exemption until the Rhode Island adjusted gross income exceeds $175,000. It also allows some of the taxable income to be taxed at 3.75 percent and some at 4.75 percent. For taxpayers already using the alternative flat tax, that is a reduction in tax liability of approximately $2,000. The new system also allows the tax liability to be reduced by certain credits.
PBN: What are the credits that can be applied against the Rhode Island personal income tax?
THOMPSON: The only credits available to reduce the Rhode Island tax are the lead credit, the credit for taxes paid to other states, the dependent care credit, the earned income credit, the film credit and the historic tax credit. Two credits noticeably missing are the enterprise zone credit and the investment tax credit. A renewed interest in the historic tax credit and the film credit will result from the legislation.
