The Aftermath of the 2010 Tax Battle

The Aftermath of the 2010 Tax Battle

Rhode Islanders were involved in a struggle to protect their income from taxes on two fronts in 2010, both at the federal and the state level. Governor Carcieri signed legislation changing the state income tax in June of last year, while a Federal Act wasn’t signed into law until the 17th of December. The Federal Act was pushed through to avoid tax increases in the face of a tenuous recovery from a recession. The Rhode Island tax changes aim to make the state a more attractive option to businesses and individuals. Now that the dust has cleared, we can begin to plan around the changes, including the following:

FEDERAL TAXES

Individual Tax Rates/Capital Gains – For 2011 and 2012, the top tax rate stays at 35%, while the rate for capital gains and qualified dividends remains at 15%. Holding these rates steady probably avoided a huge sell-off to end 2010.
Payroll Tax Reduction – The Federal Act reduces the employee rate on Social Security contributions from 6.2% to 4.2%. Now, some of you may be saying, “Hey, doesn’t that mean that there’s even less money being paid into a Social Security benefit that is already woefully underfunded?” Don’t worry! Congress has declared that the ‘General Fund’ will reimburse Social Security for any shortfall. What deficit??

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Estate Tax – If you’re reading this, then there’s a good chance that you didn’t die in 2010. That’s probably for the best, as the Federal Tax Act of 2010 retroactively reinstates the estate tax, only allowing for different elections. If you are handling an estate for a decedent that passed away in 2010 and subject to estate tax, you should be consulting an attorney and/or financial planner to figure out how to proceed going forward.

RHODE ISLAND INCOME TAX

Tax Brackets – Gone are the five tax brackets ranging from 3.75% to 9.9%. For 2011, we’ll have three brackets, with the highest tax rate at 5.99% for income over $125,000. Itemized deductions have been eliminated and the standard deduction and exemptions are eliminated for those earning $195,000.

Credits – While many of the credits have been eliminated, one that still remains is the “motion picture productions” tax credit. Maybe we’re hoping someone films “Jersey Shore: The Movie” here to revitalize the economy?

Dan Forbes is a regular contributor on business financial issues. His office is in Providence, RI. He leads the firm Forbes Financial Planning and can be reached at dforbes@forbesplanning.com