On June 9, 2010, Governor Donald Carcieri signed legislation bringing significant reform to the personal income tax system beginning with the 2011 calendar year. The legislation reduces the highest marginal income tax bracket from 9.9% to 5.99%, and reduces the number of income tax brackets from five to three. The legislation eliminates the option to itemize deductions, increases the amounts of the standard deduction, reduces the amount of the personal exemption, and limits the types of credits that may be taken. Finally, the alternative flat tax is eliminated. (L. 2010, H8196A/S2921A, effective 01/01/2011.)
Tax rates. The tax rates have been revised, providing three taxable income brackets for married individuals filing jointly, qualifying widows, head of households, unmarried individuals, married individuals filing separately and bankruptcy estates, effective for tax years beginning after December 31, 2010: $0-$55,000, 3.75%; $55,000-$125,000, 4.75%; and over $125,000, 5.99%. Previously, there were five brackets with rates ranging from 3.75% to 9.9%, and the income brackets differed depending on the filing status. In addition, the revised tax rates provide three taxable income brackets for an estate or trust: $0-$2,230, 3.75%; $2,230-$7,022, 4.75%; and over $7,022, 5.99%. Previously, the rates for an estate or trust were based on five taxable income brackets: $0-2,150, 3.75%; $2,150-$5,000, 7%; $5,000-7,650, 7.75%; $7,650-10,450, 9%; and over $10,450, 9.9%.
Deductions. The legislation eliminates the option to itemize deductions and increases the amounts of the standard deduction based on the filing status as follows: single, $7,500; married filing jointly, $15,000; married filing separately, $7,500; and head of household, $11,250. Previously, the amounts of the standard deductions based on the filing status were as follows: single, $5,700; married filing jointly, $9,550; married filing separately, $4,750; and head of household, $8,400. In addition, the standard deduction is phased out for taxpayers whose adjusted gross income exceed $175,000 such that the standard deduction is reduced by 20 percentage points for each $5,000 by which the taxpayer’s adjusted gross income for the taxable year exceeds $175,000.
Personal exemption. For purposes of computing the personal exemption, the legislation reduces the exemption amount from $3,650 to $3,500. In addition, the personal exemption is phased out for taxpayers whose adjusted gross incomes exceed $175,000 such that the personal exemption is reduced by 20 percentage points for each $5,000 by which the taxpayer’s adjusted gross income for the taxable year exceeds $175,000.
Credits. The legislation limits the types of credits that may be taken against personal income tax to the following: earned income credit; property relief credit; lead paint credit; credit for income taxes of other states; historic structures tax credit; motion picture productions tax credit; child and dependent care credit; tax credits for scholarships to scholarship organizations; and credit for tax withheld. For purposes of the property tax relief credit against personal income tax, the calculation of “income” does not include any deductions for rental losses, business losses, capital losses, exclusion for foreign income, and any losses received from pass-through entities.
Alternative flat tax. The alternative flat tax option is eliminated for tax years 2011 and thereafter.
For more information about these changes, contact Moore McLaughlin, Esq. at 401-421-5115 ext 212 or by e-mail at MMcLaughlin@McLaughlinQuinn.com.
Tom and I have reviewed hundreds, if not thousands, of tax returns throughout our respective careers. We have seen some that are properly and accurately prepared. We have seen others that are complete disasters. What is interesting is that no license is required to become a paid tax return preparer. Tax return preparers do not have to be licensed by the federal government or any state agency in order to prepare tax returns for a fee.