A Warwick accountant, conducting research for a client’s business tax return, found a new Connecticut law that helps business taxpayers avoid a personal $10,000 limit for state and local tax deductions.
For many Rhode Islanders, that $10,000 ceiling created by the 2017 federal tax overhaul is going to be a low threshold, because it includes property taxes and income taxes.
The accountant, Randy Dittmar, a partner at Dittmar, McNeil & Varone, isn’t in the business of writing legislation. But his research, which he and fellow accountant Grafton “Cap” Willey IV verified, is what led to legislation recently introduced by House Majority Leader K. Joseph Shekarchi, D-Warwick.
The proposal would allow small businesses, including sole proprietorships, unincorporated consultants and freelancers, limited-liability companies and other similar “pass-through” entities, to pay the tax as a business tax, rather than a personal income tax.
Business taxes are not subject to the $10,000 limit for the state and local tax deduction, under the IRS code.
And the small businesses would not have to be incorporated differently to take advantage of the proposal.
“[The legislation] changes who is going to pay the tax on the income earned on small businesses,” Dittmar said.
Because it’s still relatively early in the tax season, Dittmar said he hasn’t heard too many complaints about the new tax law from current clients. But those unhappy conversations are coming.
In Rhode Island, it is not at all uncommon for homeowners with decent jobs to amass more than $10,000 in state and local tax payments. Under the new tax code, if they pay taxes as individuals, they cannot deduct anything more.
The impact will be felt by middle-class earners, Dittmar and Shekarchi said, because of the property taxes in Rhode Island.
“If they have a decent job here in Rhode Island – say they’re making $60,000 or $70,000 a year – and they’re paying [$2,000] or $3,000 a year in income tax, that’s not the problem,” said Dittmar. “The problem is when you add the property tax.”
Many communities have property taxes in the range of $4,000 to $5,000 for middle-class homes. The taxes on his own Warwick home, valued in the low $200s, when combined with his income taxes will push him to the $10,000 limit, Dittmar said.
Designed to be revenue-neutral for state tax purposes, the bill has 19 co-sponsors and bipartisan support. It is supported by Gov. Gina M. Raimondo’s administration, Shekarchi said.
It is modeled after the Connecticut law, he said, which took effect this year. The Rhode Island proposal, if it passes, would take effect with 2019 taxes.
“Thirty-nine percent of Rhode Islanders will see a positive benefit” at tax time, Shekarchi said.
The federal tax overhaul, he added, “really stuck it to a lot of people in what we call high-tax states. And Rhode Island is one of them.”
Mary MacDonald is a staff writer for the PBN. Contact her at Macdonald@PBN.com.
