Individual Income Tax

Transcription

1 Individual Income Tax The modern Missouri individual income tax became effective January 1, Be cause this tax was independent of the fed er al income tax adopted the same year, the enabling legislation specifically defined all related tax items, in clud ing gross income and deductions. The original tax was a flat rate levy of one-half percent of net taxable income. Exemptions for taxpayers and dependents were not introduced until 1919 and the present tax rate structure of grad u at ed tax rates and bracket was not in tro duced until Exhibit 3 contains a historical summary of the major parameters of the Missouri in di vid u al income tax. Appendix II contains a historical summary of the statutory tax rates. While there have been many mod i fi ca tions to this tax since its inception, the most sig nifi cant was the enactment of what is now Chapter 143, RSMo. This change, which became effective January 1, 1973, redefined the Mis sou ri income tax in terms of federal statutes. As a con se quence, ad just ed gross income and most de duc tions are now determined by the Internal Rev e nue Code. The base of the Missouri individual income tax is, in essence, federal adjusted gross. The latter is defined as total, or gross, income less selected sources of income and specific mod i fi ca tions. These items are called statutory exclusions. They include such items as pay ments to IRA or Keogh plans and insurance premiums paid by selfemployed individuals. Also in clud ed in this category are interpersonal transfers, such as al i mo ny paid and gifts received which are ex clud ed to avoid double taxation of these items. The largest group of tax preference items excluded from the definition of in come, how ev er, consists of specific sources of income such as government transfer pay ments (for example veterans benefits and income main te nance pay ments) and em ploy er provided fringe ben e fits. Taxable income is defined as adjusted gross income less total deductions. The latter consists of two parts. First are personal expenditures per mit ted by law, for example charitable con tri bu tions and cer tain interest payments. In lieu of itemizing such ex pen di tures, taxpayers have had the option of using the standard deduction since The second set of deductions are tax pay er and dependency exemptions. These have also been the result of both political and practical con sid er ations, such as keep ing the total number of returns within manageable pro por tions and dif fer en ti at ing liability based on family size. Exhibit 4 provides a schema of the re la tion ships between the federal and Missouri definitions. Those items designated with a are con sidered tax expenditures. Exhibit 5 presents estimated revenue losses for all currently defined individual income tax ex pen di tures. As with all such estimates, some cautions pertain to their potential use and misuse. Individual Income Tax by Calendar Year 2006 Rank of portion of gross receipts: 1 Average 2006 Tax Rate: 5.3% Gross Receipts General Fund 4, Other Tax Expenditures Exclusions Deductions 3, Credits First, they cannot be meaningfully ag gre gat ed. This is the result of interactions between the various items. In general, the simultaneous elimination of more than one deduction will have a smaller revenue effect than the sum of their individual com po nents. Conversely, the elim i - na tion of more than one exclusion would have a larger impact than the sum of the individual exclusions. Secondly, these estimates may not ac cu rate ly project what the actual revenue gains would be as a result of eliminating a particular ex pen di ture. Many of the provi sions are de signed to reduce the cost of a particular activity, for example, accelerated depreciation or charitable contributions. If either were to be altered or eliminated, the ef fec tive price of investment or charity would be increased. Economic theory would suggest that the purchases of items so affected would decline, perhaps quite precipitously. Another issue involved is that of the timing of certain expenditures. This issue is of particular im por tance in the case of the expensing of busi ness ex pen di tures. For individuals and cor po ra tions that opt to either expense or amor tize certain outlays, the tax expenditure is mea sured by the dif fer ence be tween the de duc tion utilized and that of capitalizing the expenditure. As a result, these decisions will lead to negative tax ex pen di tures in later years when the taxpayer does not have the de pre ci a tion de duc tion. 7

2 Exhibit 3 Missouri Individual Income Tax Parameters Standard Deduction Amounts 1 Defined by Graduated Exemption Amounts Single Combined Year Federal Statutes Tax Rates Taxpayer Dependents Percent Minimum Maximum Minimum Max i mum No No 0 0 3, No No $1,000 $ No Yes $1,000 $ No Yes $1,200 $ Yes Yes $1,200 $ , , Yes Yes $1,200 $ , , Yes Yes $1,200 $ $1,600 - $2,300 $1,900 - $2, Yes Yes $1,200 $ $1,700 - $2,400 $2,100 - $2, Yes Yes $1,200 $400 $2,200 $3, Yes Yes $1,200 $400 $2,200 $3, Yes Yes $1,200 $400 $2,300 $3, Yes Yes $1,200 $400 $2,300 $3, Yes Yes $1,200 $400 $2,300 $3, Yes Yes $1,200 $400 $2,300 $3, Yes Yes $1,200 $400 $2,300 $3, Yes Yes $1,200 $400 $2,300 $3, Yes Yes $1,200 $400 $2,390 $3, Yes Yes $1,200 $400 $2,480 $3, Yes Yes $1,200 $400 $2,540 $3, Yes Yes $1,200 $400 $3,000 $5, Yes Yes $1,200 $400 $3,100 $5, Yes Yes $1,200 $400 $3,250 $5, Yes Yes $1,200 $400 $3,400 $5, Yes Yes $1,200 $400 $3,600 $6, Yes Yes $1,200 $400 $3,700 $6, Yes Yes $1,200 $400 $3,800 $6, Yes Yes $1,200 $400 $3,900 $6, Yes Yes $1,200 $400 $4,000 $6, Yes Yes $1,200 $400 $4,150 $6, Yes Yes $1,200 $400 $4,250 $7, Yes Yes $1,200 $1,200 $4,300 $7, Yes Yes $2,100 $1,200 $4,400 $7, Yes Yes $2,100 $1,200 $4,550 $7, Yes Yes $2,100 $1,200 $4,700 $7, Yes Yes $2,100 $1,200 $4,750 $9, Yes Yes $2,100 $1,200 $4,850 $9,700 = Not applicable 1 Beginning in 1977, the former two-part standard deduction was replaced by a single de duc tion based on marital status. 2 Projected 8

3 Exhibit 3 (continued) Missouri Individual Income Tax Parameters Standard Deduction Amounts 1 Defined by Graduated Exemption Amounts Single Combined Year Federal Statutes Tax Rates Taxpayer Dependents Percent Minimum Maximum Minimum Max i mum 2005 Yes Yes $2,100 $1,200 $5,000 $10, Yes Yes $2,100 $1,200 $5,150 $10, Yes Yes $2,100 $1,200 $5,350 $10, Yes Yes $2,100 $1,200 $5,550 $11, Yes Yes $2,100 $1,200 $5,750 $11, Yes Yes $2,100 $1,200 $5,950 $11, Yes Yes $2,100 $1,200 $6,200 $12,400 = Not applicable 1 Beginning in 1977, the former two-part standard deduction was replaced by a single de duc tion based on marital status. 2 Projected 9

4 Exhibit 4 Derivation of Missouri Taxable Income Individuals Total or Gross In come Wages, salaries Annuities and pensions Dividends received State and local income tax refunds Alimony received Taxable interest received Net business profi ts Net gain on sales or exchanges Commissions, bonuses and tips Certain taxable fringe benefi ts Net rent and royalty Prizes Net farm income Taxable social security Unemployment compensation minus Exclusions from Gross In come equals Federal Adjusted Gross In come plus Positive Ad just ments minus Negative Ad just ments Self-employed retirement plans contributions (Keogh) Alimony paid Contributions to individual retirement accounts Interest forfeited upon premature withdrawal from time savings account Employment-Related moving expenses Self-Employment tax Self-Employed health insurance premiums Interest on state and local obligations Partnership, fi duciary or S corporation adjustments Other positive adjustments Interest from exempt federal obligations Interest on Missouri state and local obligations State income tax refund included in federal adjusted gross income Partnership, fi duciary or S corporation adjustments Other negative adjustments: Exempt railroad retirement benefi ts Enterprise zone income equals Missouri Ad just ed Gross Income minus Deductions Standard or itemized deductions Federal income tax Other federal tax deductions Taxpayer exemptions Dependency exemptions Government pensions - Tax expenditure 10

5 Exhibit 4 (continued) Derivation of Missouri Taxable Income Individuals equals Missouri Taxable In come equals Gross Tax Due Be fore Cred its less - Tax expenditure Credits equals Net Tax Due Multiplied by the effective tax rate or rates Senior citizen's property credit Neighborhood assistance credit New or expanded business facility credit Development reserve credit Wood energy credit Jobs training credit Seed capital credit Special needs adoption credit Timely remittance of withholding discount Enterprise zone credit Affordable housing credit Export fi nance credit Low income housing credit Small business incubator credit Infrastructure development credit Qualifi ed research expense credit Small business investment credit Higher education scholarship credit Brownfi eld tax benefi ts credit Community bank investment credit Business use incentives credit Youth opportunities credit Charcoal producers credit Historic preservation credit Maternity home credit Domestic violence shelter credit Sponsorship & mentoring credit Film production credit Wine & grape production credit MOSTARS higher education scholarship credit Rebuilding communities credit Missouri individual training account program credit Transportation development credit Advantage Missouri trust fund tax credit Agricultural product utilization contributor credit Bank tax credit for S corp. shareholders Dry fi re hydrant credit Family development account credit New enterprise creation credit New generation cooperative incentive credit Remediation tax credit SBA guaranty fee credit Pharmaceutical credit Shared care credit Disabled access credit Mature worker child care credit Strategic initiative investment income credit Rebuilding community/neighborhood preservation credit Bank franchise credit Demolition tax credit Development tax credit New Enhanced Enterprise Zone credit Missouri Quality Jobs Children In Crisis Residential Treatment Center Pregnancy Resource Center Family Farm Credit 11

6 Exempt Income B.01 Pensions Exhibit 5 - Part 1 Individual Income Tax Expenditures - Missouri Statutes R 2004R 2005P 2006F 2007F 2008F 2009 F 2010 F 2011 F Government Private 27.1 B.03 Distribution Trust NA NA NA NA NA NA NA NA NA NA NA B.04 Enterprise Zone Modifi cation B.05 Lottery Prizes B.06 Brownfi eld Income Modifi cation B.07 National Socialist Persecution Non-Taxable Expenditures C.01 Standard Deduction C.02 Itemized Deduction C.02a Total C.02b Require Standard Deduction C.09 Artistic Literary Works C.10 Social Security Taxes C.13 Federal Income and Other Taxes C.14a Health Insurance - Long-term C.14b Health Insurance - Self-employed Personal Exemptions C.15 Taxpayer Exemptions C.16 Dependent Exemptions C.17a Dependent Students 19 or Over C.17b Dependent Age 65 & Older Other C.18 Combined vs. Joint Return Figures in millions of dollars; NA = Not available; = Not applicable; = Less than $50,000; F = Forecasted; P = Preliminary numbers ; R = Revised numbers; = repealed or expired 1 In 2003 Federal Government allows 100% of expenditure on self employment health insurance to be deducted. No longer on Missouri tax form. 12

7 D.01 Senior Citizen Property Tax D.02 Neighborhood Assistance D.03 Business Facility D.04 Development Reserve D.05 Enterprise Zones D.06 Wood Energy D.07 Seed Capital Credit D.08 Special Needs Adoption D.09 Timely Withholding NA NA NA NA NA NA NA NA NA NA NA D.10 Affordable Housing D.11 Export Finance D.12 Missouri Low Income Housing D.13 Small Business Incubator D.14 Infrastructure Development D.15 Jobs Training D.16 Qualifi ed Research D.17 SBIC D.18 Higher Education Scholarship D.19 Brownfi eld Job/Investment Credits D.20 CDC/Community Banks D.21 BUILD D.22 Youth Opportunities D.23 Charcoal Producers D.24 Historic Preservation D.25 Maternity Home D.26 Shelter for Victims of Domestic Viol D.27 Sponsorship and Mentoring D.28 Film Production D.29 Wine and Grape D.31 Rebuilding Communities D.32 Missouri Individual Job Training D.33 Transportation Development D.37 Advantage Missouri Program D.38 Agricultural Product Utilization Con D.39 Bank Tax Credit for S-Corp D.40 Dry Fire Hydrants Missouri Credits Exhibit 5 - Part 1 (continued) Individual Income Tax Ex pen di tures - Missouri Statutes R 2004R 2005P 2006F 2007F 2008F 2009 F 2010 F 2011 F See Appendix III for information on D.30, D.34, D.35, and D.36. Figures in millions of dollars; = Not applicable; = Less than $5,000; F = Forecasted numbers, P = Preliminary numbers ; R = Revised numbers = repealed or expired; NA=Not Available 13

8 Missouri Credits Exhibit 5 - Part 1 (continued) Individual Income Tax Ex pen di tures - Missouri Statutes R 2004R 2005P 2006F 2007F 2008F 2009F 2010 F 2011 F D.41 Family Development Account D.42 Enterprise Creation D.43 New Generation Cooperative Incentive D.44 Remediation (Brownfi eld) D.45 SBA Guaranty Fee D.46 Pharmaceutical D.47 Shared Care D.48 Disabled Access D.49 Mature Worker D.50 Strategic Initiative D.51 Neighborhood Preservation D.52 Bank Franchise D.53 Demolition D.54 Development Tax Credit Figures in millions of dollars; = Not applicable; = Less than $5,000; F = Forecasted numbers; P = Preliminary numbers; R = Revised numbers = repealed or expired; NA=Not Available 14

9 Exhibit 5 - Part 2 Individual Income Tax Expenditures - Federal Statutes F 2006 F 2007 F 2008 F 2009 F 2010 F 2011 F Exempt Income A.01 Military Benefi ts & Allowances A.02 U.S. VA Benefi ts A.03 Military Disability Pensions A.04 Railroad Retirement Benefi ts A.05 Social Security Benefi ts A.06 Scholarships and Fellowships A.07 Workmen s Compensation Benefi ts A.07b Worker's Compensation Insurance Premiums 22.0 A.08 Cash Public Assistance A.09 State & Local Interest (G.O.) A.10 State & Local Interest (Other) A.52 Highway Projects & Rail Truck Transfer Facilities Exempt Fringe Benefits A.11a Meals & Lodging A.11b Miscellaneous Fringe Benefi ts A.11d Educational Expenditures A.11e Employer-provided Child Care A.11h Pension/Profi t Sharing Plans A.11i Medical Insurance A.11j Accident/Disability Premiums A.11l Supplemental U.I A.11n Employer Provided Transit Passes A.11o Reimbursed Parking Expenses Other Personal Exclusions A.12 Income Earned Abroad A.13 IRA Plans A.14 Keogh Plans A.15 Life Insurance A.17c Capital Gains on Home Sales Figures in millions of dollars; NA = Not available; = Not applicable; = Less than $50,000; F = Forecasted, 2 Beginning in 2005, we switched from the Standard Industrial Classifi cation (SIC) system to the North American Industrial Classifi cation System (NAICS). With such a change, it becomes impossible to directly compare tax expenditures values prior to 2005 with those in 2005 and subsequent years. 15

10 Exhibit 5 - Part 2 (continued) Individual Income Tax Ex pen di tures - Federal Statutes F 2006F 2007F 2008F 2009 F 2010 F 2011 F Other Personal Exclusions A.18 Capital Gains at Death A.19 Carry-Over Capital Gains on Gifts A.22 Parsonage Allowance A.24 U.S. Savings Bonds A.28 Self-Employed Health Insurance Premiums A.29 Self-Employment Tax A.30 Cancellation of Indebtedness A.32 Medical Savings Account A.35 Deferral of State Prepaid Tuition Plans A.36 Education IRA A.37 Deduction of Interest on Student Loans A.40 Utility Conservation Subsidies A (k) Plans A.42 Deduction for Higher Education Expenses A.43 Deduction for Teacher Expenses A.44 Imputed Net Rental Income-Owner Occupied A.47 Discharge of Student Loan Indebtedness A.53 Housing Hurricane Katrina Displaced Individuals 0.1 Business Exclusions A.23b Timber Growing Costs A.23c Percentage Over Cost Depletion: Fuels Non-Metallic Minerals A.23d Farm Cash Accounting Rules Expensing Certain Costs Multi-Year Production Costs A.23e Research/Development Costs A.23f Mineral Exploration/Development A.23g Accelerated Depreciation Rental Property Other Property Machinery & Equipment A.23h Historic Structures A.23k Special Treatment of Farm Loans Figures in millions of dollars; NA = Not available; = Not applicable; = Less than $50,000; F = Forecasted, 2 Beginning in 2005, we switched from the Standard Industrial Classifi cation (SIC) system to the North American Industrial Classifi cation System (NAICS). With such a change, it becomes impossible to directly compare tax expenditures values prior to 2005 with those in 2005 and subsequent years. 16

11 Exhibit 5 - Part 2 (continued) Individual Income Tax Ex pen di tures - Federal Statutes F 2006F 2007F 2008F 2009 F 2010 F 2011 F Business Exclusions A.23l Business Start-Up Costs A.23n Imputed Interest Rules A.23o Passive Loss Real Estate A.23p Gas & Oil Exception A.25 Real Property Installment Sales A.27 Small Corporation Stock Sale Losses A.27a Capital Gains Exclusion for Small Business Stock A.33 Expensing Environmental Remediation Costs A.34 Income Averaging for Farmers A.38 Expensing of Certain Small Investments A.39 Empowerment Zones A.45 U.S. Production Activities A.46 Sale or Exchange of Certain Brownfi eld Sites A.48 Film & TV Productions A.49 Low Sulfer Diesel Expensing to Coop Owners 0.1 A.50 Geological & Geophysical Expenditures Over 2 years A.51 Energy Efficient Commercial Building Property Figures in millions of dollars; NA = Not available; = Not applicable; = Less than $50,000; F = Forecasted, 2 Beginning in 2005, we switched from the Standard Industrial Classifi cation (SIC) system to the North American Industrial Classifi cation System (NAICS). With such a change, it becomes impossible to directly compare tax expenditures values prior to 2005 with those in 2005 and subsequent years. 17