TAX NEWS - June 2010

Rhode Island Tax: New income tax law

Some questions you may have about the new Rhode Island income tax law.

Q: Will this change my taxes this year?

A: No. The old rules are in effect for the rest of this year. So the changes won't affect the amount withheld from your paycheck for the rest of this year. You'll continue to apply the old rules for calculating your remaining quarterly estimated payments for this year (including the one due in January 2011). You'll also use the old rules early next year when you do your Rhode Island income tax return covering the 2010 tax year.


Q: So when will the new rules kick in?

A: On Jan. 1, 2011. The state Division of Taxation will publish new withholding tables later this year to cover 2011, said state Tax Administrator David M. Sullivan. The new rules will also be incorporated into the forms the agency will publish for quarterly estimated payments covering 2011.

Also, the new rules will be reflected on the tax returns covering 2011. Thus, the first time that many taxpayers will encounter the new rules will be in early 2012, when they do their 2011 Rhode Island income tax returns.


Q: So what's the big deal?

A: To figure your Rhode Island individual income tax, you first list your income (a figure you carry over from your federal return). You then get to reduce that figure by various deductions and exemptions.

What remains is your Rhode Island taxable income, which is now sorted into five different baskets, or brackets. There's a different set of brackets depending on your "filing status" (whether you are married or single, for example). Each basket carries its own tax rate. There are five rates: 3.75 percent, 7 percent, 7.75 percent, 9 percent and 9.9 percent.

Under the new system, there will be just three brackets and three tax rates: 3.75 percent. 4.75 percent and 5.99 percent. No matter your filing status, you'll use the same brackets and the same rates.

So the new system is clearer and easier to understand. "It's a simplified system that will reduce the size and complexity of [tax] forms," Sullivan said.

Also, because of the new law, more of your income will be taxed at lower rates. For that and other reasons, many people will end up paying somewhat less in tax.


Q: What about deductions?

A: To figure your Rhode Island personal income tax now, you have a choice: Claim a lump-sum amount (known as the standard deduction; the amount differs depending on your filing status), or make a separate list of your deductions — for mortgage interest, local property taxes, charitable contributions and the like — a process known as itemizing. Under the new system, itemizing won't be allowed; all taxpayers will have to claim the standard deduction.

If you're a married couple filing a joint return (or a qualifying widow or widower), your standard deduction amount will be $15,000, up from $9,550 for this year.

If you're single, or married filing a separate return, it'll be $7,500 (compared with $5,700 for this year if you're single, $4,750 if married filing separately).

If you file as "head of household," which is mainly for single parents, it'll be $11,250, up from $8,400 for this year.

(There'll be no additional standard deduction amounts if you're 65 or older, or blind.)


Q: How about exemptions?

A: You'll still get to claim a certain type of deduction, called an exemption, for you, your spouse and each of your dependents. This year, it's $3,650. Next year, it'll drop to $3,500 (and will be adjusted for inflation thereafter).


Q: Will I get the full standard deduction and exemption amounts?

A: In general, you'll get the full benefit if your modified adjusted gross income (for Rhode Island tax purposes) is $175,000 or less. But if it's between $175,000 and $200,000, you'll get partial standard deduction and exemption amounts. If your income is more than $200,000, you'll get no exemptions and no standard deduction.


Q: What about credits?

A: For this year, there are more than 30 Rhode Island tax credits, some popular, others obscure.

Starting next year, Rhode Island will allow only a handful, including the earned income credit, statewide property-tax relief credit, lead-paint abatement credit, credit for taxes paid to other states, historic structures tax credit, movie and TV production credit, child-care credit, and credit for contributions to a scholarship organization whose funds are used to pay private school tuition for needy pupils.

Eliminated starting next year, at least for the personal income tax, are certain rarely used credits (but potentially valuable for certain taxpayers), such as the Rhode Island investment tax credit and the Rhode Island research and development credits.


Q: What about capital gains?

A: Profits from the sale of stock, mutual fund shares, land, and other such assets held for investment will continue to be taxed as ordinary income, the same as wages or interest from a bank or credit union account. But because the top rate has changed, Rhode Island's maximum tax rate on capital gains will be 5.99 percent, down from the current 9.9 percent.


Q: What happens to the flat tax?

A: For 2010, you figure your Rhode Island tax in two ways, and use the one that gives you the biggest break.

The first is the regular system, which lets you claim deductions, exemptions and credits, and has a number of tax brackets and rates.

The second system, called the flat tax method, doesn't let you claim deductions, exemptions or credits, but carries a single flat rate. That rate is 6 percent for this year, and was to be 5.5 percent for 2011 and later years. But the new law scraps the flat tax system for 2011 and later years (while essentially making the regular system flatter).


Q: What about adjustments for inflation?

A: Tax brackets, exemption amounts and standard deduction amounts will be adjusted each year to reflect inflation, the same as happens under the old rules, Sullivan said. "There'll be no difference in the calculation at all," he said.


Q: How will the new Rhode Island personal income tax system compare with Connecticut and Massachusetts?

A: Massachusetts generally taxes most types of income at 5.3 percent, some at 12 percent; Connecticut has a top rate of 6.5 percent.