It’s another busy month in the world of state and local taxing authorities, with lots of changes. Some changes take effect retroactively and some are in the future, but if you live or work in these states, take a look at how these tax items affect you:

Alabama

A new income tax credit is available to Alabama resident taxpayers (other than estates, trusts, and those who were claimed as a dependent by another taxpayer). The amount of the credit is $150 for taxpayers who filed their return for the tax year beginning January 1, 2021 as single, head of family, or married filing separate, and $300 for those who filed as married filing joint. 

The refundable tax credit will be electronically deposited in the bank account of the taxpayer indicated on the return for the year beginning January 1, 2021, and checks will be mailed to taxpayers for whom the Department of Revenue does not have bank account information. The credits will be issued no sooner than November 30, 2023. 

The credit will not constitute taxable income for Alabama income tax purposes and will not be subject to offset or debt collection against any liability.

Connecticut

Reduced personal income rates - For taxable years beginning January 1, 2024, the individual tax rate is lowered to 4.5% from 5.0% and to 2% from the 3.0% rate. These rates are capped at $150,000 for single filers and $300,000 for joint filers.

Business tax surcharge extension - The 10% corporation business tax surcharge is extended through 2025.

Revisions to pass-through entity tax - Effective January 1, 2024, the pass-through entity tax is made optional, rather than mandatory. Entities that elect to pay the tax must give the Department of Revenue Services (DRS) commissioner written notice for each tax year that they make the election, no later than the due date for filing the return including extensions. The bill also reinstates the requirement that entities pay the tax on behalf of any nonresident member for whom the business is the only source of Connecticut income. Two other related items have been eliminated - the corporation tax credit for pass-through entity taxes paid, and the option for entities to file a combined return with one or more commonly-owned entities. 

Hawaii

Effective for tax years after December 31, 2021, the state’s computation of tax where taxpayer restores substantial amount held under claim of right is made operative for state income tax purposes.

Illinois

Beginning July 1, 2023, the state’s 1% tax will resume collection on sales of groceries. The rate was suspended from July 1, 2022 through June 30, 2023.

Iowa

Filing status conformity - Beginning on or after January 1, 2023, Iowa taxpayers will be required to use the same filing status for state income tax purposes as they use for federal income tax purposes.

Bonus depreciation – Effective January 1, 2023, Iowa conforms to federal bonus depreciation rules, allowing for increased expensing under IRC Section 179 for assets placed in service on or after January 1, 2023.

Minnesota

A tax bill signed by Governor Waltz in May 2023 makes sweeping changes to tax rules affecting both businesses and individuals. Here’s a rundown:

Businesses:

• Pass-through entities (PTE) – Beginning after December 31, 2022, changes have been made to the state’s rules for electing and paying the PTE tax. The election must be made by owners who collectively hold a majority of the total ownership interests of qualifying owners. Currently, the rules require that one or more owners of the entity must be subject to the federal state and local tax (SALT) deduction limit, but the bill removes that requirement. The state’s website has not yet been updated for these changes.
• Computation of qualifying owner’s net investment income tax liability – Beginning after December 31, 2023, this must be computed under Minnesota Statue §290.033. Retroactive for taxable years beginning after December 31, 2020, partnerships subject to a federal partnership level audit must report adjustments and file a new PTE tax return to account for the changes.
• Credit for taxes paid to another state – Beginning after December 31, 2022, if a pass-through entity paid tax to another state, a credit is allowed for a qualifying owner for purposes of Minnesota taxes. In addition, a resident sole member of a disregarded LLC is considered to have paid an equal amount of the net income tax paid by the disregarded LLC to another state.
• Net operating loss deduction – Beginning after December 31, 2022, the amount of the Minnesota net operating loss deduction cannot exceed 70% (previously 80%) of taxable net income in a single taxable year.
• Dividends received from another corporation – Effective for taxable years beginning after December 31, 2022, Minnesota will allow a 50% or 40% deduction for dividends received from another corporation (previously a 80% or 70% dividend deduction), depending on whether the receiving corporation owns 50% (previously 20%), or less than 20% of the stock of the paying corporation.

Individuals:

• Additional tax on net investment income – Beginning after December 31, 2023, a 1% additional tax is imposed on the net investment income of individuals, estates, and trusts in excess of $1 million.
• State itemized and standard deduction phase-out – Beginning after December 31, 2022, phase-out amounts are adjusted as follows:

1. The lesser of 3% of the excess of the taxpayer’s 3% of the excess of the taxpayer’s AGI over $220,650 but not over $304,970 plus 10% of taxpayer’s AGI over $34,970 or
2. 80% of the amount of the taxpayer’s itemized or standard deduction.
3. Itemized and standard deductions are reduced by 80% if the taxpayer’s AGI is over $1 million.
4. For tax years beginning after December 31, 2023, phase-out amounts will be adjusted for inflation.

• One-time refundable tax credit – Taxpayers who filed a 2021 Minnesota individual income tax return or a property tax return are eligible for a tax rebate of $520 for a married couple filing jointly or $260 for individuals filing single/head of household/married filing separately. This credit is not available to individuals who:

1. Were not a resident of Minnesota during any part of 2021;
2. Were a dependent for 2021;
3. Had AGI for taxable years beginning in 2021 greater than $150,000 (married filing jointly) or $75,000 (all other filing statuses); or
4. Died before January 1, 2023.

• Taxability of social security benefits – Effective for tax years beginning after December 31, 2022, married taxpayers filing jointly with AGI below $100,000 or single/head of household taxpayers with AGI below $78,000 can subtract the full amount of the taxpayer’s taxable social security benefits.

1. For each $2,000 of AGI in excess of the phaseout amounts, the subtraction is reduced by 10%.
2. These threshold amounts are indexed for inflation.

• Taxability of public pension benefits – Effective for taxable years beginning after December 31, 2022, the bill enacts a subtraction for a portion of public pension benefits. The subtraction applies to pension benefits that are earned based on service for which the member or survivor did not earn social security benefits. The subtraction applies to state or federal pension plans whose members do not qualify for social security benefits. The bill defines these benefits as "qualified benefits." The subtraction is limited to $25,000 for married joint filers, and $12,500 for other filers. The subtraction is phased out beginning at $100,000 of AGI for married joint filers and $78,000 for single and head of household filers. The subtraction is reduced by 10% for each $2,000 of AGI above those thresholds.
• Student loan discharges – Effective for taxable years beginning after December 31, 2022, the bill permanently adopts (for taxable years after 2025) the American Rescue Plan Act (ARPA) exclusion for discharged student loans, by allowing a subtraction for discharged student loans which would qualify under the ARPA exclusion.

Nebraska

Tax rates reduced – Both individual and business income tax rates will be ratcheted down to 3.99% by 2027 under a new bill signed into law at the end of May. Reductions begin in 2024 moving to 5.84% from the current individual 6.44% rate and 6.5% corporate rate.

Taxability of social security benefits – For tax years beginning on or after January 1, 2024 (one year earlier than previously), taxpayers will be able to exempt 100% of social security benefits to the extent those amounts are included in federal AGI.

Child Care Tax Credit – Beginning on or after January 1, 2024, a new refundable tax credit will be available for child care expenses paid for licensed childcare. The credit amount per child is based upon the parent's or legal guardian's total household income as follows:

• $2,000 per child, if the total household income is no more than $75,000; or
• $1,000 per child, if the total household income is more than $75,000 but no more than $150,000.

A parent or legal guardian with a total household income of more than $150,000 is not eligible for the credit.

New Mexico

Effective July 1, 2023, the statewide portion of the gross receipts tax (GRT) will drop to 4.875% on July 1, resulting in changes to the overall rates across New Mexico. This is the first GRT rate reduction in 40 years, lowering the statewide portion over two years from 5.125%.

Wisconsin

Effective January 1, 2024, the state’s personal property tax assessments will be eliminated. The new law applies to manufactured and mobile homes not otherwise exempt from taxation, and buildings, improvements, and fixtures on leased lands, exempt lands, forest croplands, and managed forest lands, which will be assessed as real property. 

States Updating Conformity with the Internal Revenue Code

Each month, we provide you with a list of states that have updated their conformity with the Internal Revenue Code. Tax laws change all the time, and state tax law doesn’t always conform to federal tax laws. Some states adopt the entire Internal Revenue Code (IRC), and some states just adopt certain portions. Some states adopt the IRC as it existed as of a certain date, so if that date is earlier than the current tax year, federal and state laws will differ more significantly. State conformity to the IRC can have a significant impact on the amount of taxes paid, so it’s important for taxpayers to understand the conformity rules in the states in which they live and work.

Here’s this month’s list of states:

Hawaii - The state’s conformity with the Internal Revenue Code has been moved up to December 31, 2022 from its previous date of December 31, 2021.

Minnesota - The state’s conformity with the Internal Revenue Code has been moved up to May 1, 2023 from its previous date of December 15, 2022. The Department of Revenue is reviewing the impact of these updates on previously filed state income tax returns and will share updated guidance and tax forms for affected tax years when available.

Oregon - The state’s conformity with the Internal Revenue Code has been moved up to December 31, 2022 from its previous date of December 31, 2021.

California Unclaimed Property Reporting Relief

Unclaimed property reporting is one of those obligations that can get swept under the rug. Each year, businesses should determine if they hold any property – such as payroll and vendor checks – that has remained unclaimed for a certain period of time (called the “dormancy period”). This unclaimed property should then be reported to the state by the annual deadline (usually November 1). The purpose of this reporting is to reunite unclaimed property with its owners.

While this reporting is required for businesses in every state, the requirement is often ignored, resulting in interest penalties. Once a business has delinquent filings, sometimes it feels easier to just keep ignoring the requirement, hoping it will go away.

The bad news? The requirement doesn’t go away. Unclaimed property that is not reported by the annual deadline in California can be subject to a 12% interest rate . . . that just keeps accruing over time.

The good news? Businesses subject to unclaimed property reporting in California have some relief coming!

Welcome to the California Unclaimed Property Voluntary Compliance Program (VCP)

Businesses can apply to waive interest assessments under the VCP by completing an application form. Acceptance into the program is based on approval by the State Controller’s Office, with the following provisions:

• Applicants must not be currently under an unclaimed property examination nor have unpaid interest assessments from the past five years.
• Also, applicants who are currently subject to civil or criminal investigation will not be considered.

The application should include the names, phone numbers, and email addresses of two people within the company who will attend mandatory unclaimed property training within three months of acceptance into the program.

Requirements for Amnesty

If accepted into the program, a business will have six months in which to provide the initial unclaimed property report to the Controller’s office. The due date of subsequent reports will be seven months and 15 days after the initial report is filed. If any of these deadlines are missed, waived interest could be reassessed back to the business.

Before submitting the report, the business will be required to go back through an indefinite period of property records to identify unclaimed property. Once identified, the business will be required to make reasonable efforts to notify the owners of that property at least 30 days prior to filing the unclaimed property report.

Need Help?

The Mize CPAs Unclaimed Property Team stands ready to assist you with this process. If you have delinquent or underreported unclaimed property, we’re here to help. Contact Brandon Mills, State and Local Tax Manager, for more information.

For more about State and Local Tax visit MizeCPAs.com