The latest legislative session had several bills pass that changed Indiana tax laws. While these changes will not affect everyone, many will have some impact. The Indiana tax code closely follows the Federal tax code with a few exceptions. The bill makes several federal deductions not eligible as state deductions and as a result you will need to add them back to your state taxable income in the future. The changes that will most likely be felt by average taxpayers are:
- Deductions for qualified tuition and related expenses
- Deductions for expenses of elementary and secondary school teachers
- The exclusion from income of a charitable contribution paid from an Individual Retirement plan
- Exclusion for employer provided educational expenses
- Exclusions for employer paid transportation fringe benefits
If you have enjoyed any of these tax breaks, next year you will be paying State income taxes on them.
Private School Deduction
The bill also created a deduction for individuals that send their children to private elementary or high school. The deduction is $1,000 per student. That will create about a $34 reduction in State income tax per child. While this is not a big impact, it is a start and I’m sure this will be revisited in future legislative sessions.
Municipal Bond Interest
If you invest in tax exempt bonds, the bill will change the way Indiana taxes Municipal bond interest. Starting in 2012, for the interest to be tax exempt in Indiana, it must be from an Indiana bond. Municipal Bond interest from other states will have to be added back to your Indiana Income (they are still fully tax exempt for Federal Income tax.)
Currently if you have a loss (or negative income on your tax return) you can carryback the loss to the two preceding tax years and receive a refund of tax paid in those years. Beginning in 2012, you will not be able to carryback the loss and will be required to carry it forward. You will still be able to carryback the Federal loss but not for the State. This applies to both individual and corporate income tax returns.
Amended Tax Returns
If your federal return is adjusted by the IRS you are now required to file an amended state return within 180 days of the federal adjustment. This provision is effective immediately.
Corporate Tax Rates
The corporate tax rate will decrease from 8.5% to 6.5%. This is phased in over the next 4 years and begins July 1, 2012.
Revenue Surplus Credit
The new credit is scheduled to become available in 2012. If state reserves exceed 10% of general revenue appropriations and accounts payable are not “unusually large” as a percentage of state revenue, then the amount above the 10% threshold would fund a credit. One half of the credit would go into a Pension Stabilization Fund and the other half would be available as a tax credit on income tax returns.
To qualify, an individual must have filed a resident income tax return in the two preceding years in Indiana. The credit will only offset tax, which means if you have no tax on your return, you will not be getting a refund created by the credit.
There are many other provisions in the bill and I have only highlighted the ones most likely to affect a large number of people.
Like most tax bills, this one has good and bad merits. The one thing it certainly does do is move us further and further away from tax simplification that most Americans want. The State of Indiana is clearly moving further away from following the Federal tax code and as a result is creating a more complex tax structure for all of us.