The Fiscal Cliff Bill complicates Iowa tax returns for 2012. Iowa doesn’t automatically adopt federal tax law changes, so some retroactive tax law provisions in the Fiscal Cliff bill won’t apply to Iowa state income taxes absent action by the Iowa General Assembly. From an Iowa Department of Revenue e-mail to practitioners yesterday:
The federal legislation passed on January 1, 2013 to avert the “fiscal cliff” included provisions for what are commonly referred to as the federal “extenders.” The federal “extenders” are not currently reflected on Iowa tax forms for 2012 and will require approval by the Iowa legislature before being allowed for Iowa tax purposes. Should legislative approval be given, Iowa online forms will be updated accordingly. The federal extender provisions include:
- Educator Expenses (Line 24; IA 1040)
- Tuition and Fees (Line 24; IA 1040)
- Itemized Deduction for State Sales /Use Tax Paid (Line 4; IA Schedule A)
- Treatment of mortgage insurance premiums as qualified residence interest (line 11, schedule A)
- The federal section 179 expensing limit of $500,000 for 2012 and 2013
Iowa income tax returns must be filed based upon current Iowa law. Therefore, the extenders should not be included on Iowa returns at this time.
Let’s hope the legislature acts quickly to pass conformity legislation, or we will have another messy Iowa tax season.
Why 12%? Today’s Des Moines Register story on reactions by Iowa business people to the Fiscal Cliff bill quotes me as saying that Iowa businesses may face a 12% reduction in their after-tax income. Where did I get that number?
I started by computing the after-tax amount of a dollar earned by a top-bracket taxpayer under 2012 law, assuming full detectability of Iowa taxes on the federal return and vice-versa. That results in a combined rate of 38.92%, leaving 60.18 cents in the taxpayer’s pocket. Under the same assumptions using the 2013 39.6% top rate and the 3.8% surtax on “passive” income, the combined federal-state effective rate goes up to 46.39%, leaving 53.61 cents after-tax. That’s a 7.48 cent reduction in after-tax income — 12.24% of the 60.18 cent 2012 after-tax number.
The 12.24% number is actually too low because it doesn’t account for the phase-out of itemized deductions for high-income taxpayers in the new bill. For top-bracket taxpayers, itemized deductions will be reduced 3 cents for each additional dollar of income. The result is a hidden 1.188% additional tax. Plugging that into our tax computation gives a combined federal and Iowa rate of 47.46%, leaving 52.54 cents after-tax. That reduces after tax income from 2012 law by 8.54 cents, or 13.99%.
Should I assume the 3.8% passive income tax, like I do in the above examples? It won’t apply to K-1 income if all owners “materially participate” in a pass-through business. Those taxpayers face “only” an 8.41% reduction in their after-tax income. If you don’t think that’s significant, consider whet your reaction would be if your employer said that your after-tax pay was going down that much.
But the 3.8% tax will apply to family members that don’t participate in the business, like out-of-town siblings, retired founders, or children of owners. The business has to distribute at least enough to let owners pay their taxes, which means the taxpayer in the highest bracket has to be covered. For that reason many family-owned businesses will have to distribute enough to cover the 3.8% Obamacare net investment income tax, making the combined 47.46% rate their real rate.
Fiscal Cliff Notes
TaxProf, House Approves Fiscal Cliff Tax Deal
Megan McArdle, After the Fiscal Cliff: What do Democrats Want? “I submit that just as Republicans are more interested in entitlement cuts as talking points than as actual new laws, Democrats will prove much more interested in tax hikes in theory than in practice.”
Robert D. Flach, THE AMERICAN TAXPAYER RELIEF ACT OF 2012
William McBride, Fiscal Cliff Resolved, Still Likely to Get Downgraded
Patrick Temple-West, Cliff bill means some pay more taxes, and more
Trish McIntire, American Taxpayer Relief Act of 2012
Paul Neiffer, Help! What Is My Capital Gains Tax Rate?!
Margaret Van Houten, Estate and Gift Law Tax Aspects of Fiscal Cliff Legislation (Davis Brown Tax Law Blog)
Courtney A. Strutt Todd, A Permanent Fix to the AMT Problem (Davis Brown Tax Law Blog)
Jana Luttenegger, Individual Tax Rates, Deductions, and Credits (Davis Brown Tax Law Blog)
Greg Mankiw has a pithy post that I hope he doesn’t mind me reproducing in full:
Here are the effective federal tax rates (total taxes as a percentage of
income) for 2013 under the new tax law, as estimated by the Tax Policy Center, for various income groups:
Bottom fifth: 1.9
Second fifth: 9.5
Middle fifth: 15.6
Fourth fifth: 19.0
Top fifth: 28.1
80-90 percentile: 21.5
90-95 percentile: 23.4
95-99 percentile: 26.3
Top 1 percent: 36.9
Top 0.1 percent: 39.6
Russ Fox, Your Mileage Log: Start It Now! Great advice. If you travel on business and the IRS comes by, you’ll be glad you have that log.
David Brunori, Only Tax Professionals Benefit from the State Corporate Tax. (Tax Analysts Blog) Well, the loophole lobbyists do pretty well by it too.
Robert Goulder, The Unspoken Tax Expenditure (Tax Analysts Blog)
William Perez, Social Security Tax For 2013
Career planning news you can use: Life After Public Accounting: Harassing Auditors For a Living Isn’t a Bad Gig If You Can Get It (Going Concern)
Tags: TaxProf, megan mcardle, Kay Bell, Russ Fox, David Brunori, greg mankiw, Robert D Flach, William Perez, Iowa tax administration, TaxGrrrl, Paul Neiffer, Going Concern, Trish McIntire, Jack Townsend, Peter Reilly, William McBride, Jana Luttenegger, Margaret Van Houten, Courtney Strutt Todd, TaxTV, Patrick Temple-West, Fiscal Cliff, Robert Goulder