Significant state tax law reform
Federal taxes often take the spotlight in tax planning, but tax laws at the state level are often responsible for big changes to your tax liability each year. As of Jan. 1, 2022, many states underwent significant tax changes. These range from cutting state income tax to creating new state taxes on capital gains income. “In 2021, states were anticipating shortfalls,” says Timothy Vermeer, senior policy analyst at the Tax Foundation. “But by the end of the year, we saw many states swimming in cash with surpluses. So many states chose to return that revenue to taxpayers.” Review these 15 state tax law changes effective in 2022 to see how your state stacks up and adjust your tax strategy accordingly.
Lowered base income tax rates in Arizona
Twelve states enacted individual income state tax cuts in 2021, according to Vermeer, some of which were retroactive to Jan. 1, 2021, and others which taxpayers began to receive at the start of 2022. Arizona was one such state that cut individual income taxes effective Jan. 1, 2022, by lowering the base tax rates for individuals to never exceed 4.5%.
Corporate income tax rate reduced in Arkansas
Starting in January, Arkansas cut its corporate income tax rate to 5.9% from 6.2%. Changes to state corporate income tax rates can have a positive impact on workers in that state, possibly leading to increases in wages for employees. Separately, Arkansas is also one of the handful of states in recent years that moved to cut its top individual income tax rates — declining from 5.9% to 5.5%.
New pass-through tax level in Colorado
Colorado is one of five states that implemented a new pass-through entity election in 2022. Each state’s rules for taxing small businesses like LLCs and partnerships vary, but generally this election option allows small businesses to choose between being taxed through the individual income tax system or at a separate rate, which Vermeer says is usually comparable to the corporate income tax rate. In Colorado, S corporations, LLCs and partnerships will have the option of electing to be taxed at a 4.55% rate.
Corporate income tax rate increased in Florida
Florida is the only state so far to increase its corporate income tax rates in 2022. As of Jan. 1, the corporate income tax rate is 5.5% due to the expiration of a 2019 tax reform that had lowered the corporate income tax rate across the state.
New pass-through option in Georgia
Similar to changes made in Colorado, small business owners in Georgia organized as partnerships and S corporations have the option to isolate business income from personal income as of Jan. 1. Businesses will have the option of being taxed at 5.75% as pass-through businesses.
New pass-through option in Illinois
Illinois now also allows partnerships and S corporations to be taxed as a separate entity starting in the 2022 tax year. The trend across states of offering this option can be traced in part to a desire for a workaround for the federal State and Local Income Tax deduction cap, Vermeer says. If business income is separated from personal income, business owners can take full advantage of this deduction.
Eliminated inheritance tax in Iowa
Some states impose an inheritance tax, which taxes assets received from a deceased person’s estate. Iowa, however, is in the process of eliminating its inheritance tax with plans to completely eliminate the tax by 2025. As part of that phaseout, a 40% reduction of inheritance tax rates took effect on Jan. 1 of this year.
Lowered maximum income tax rate in Louisiana
By a state constitutional change, Louisiana taxpayers can now expect the state individual income tax rate to be at or below 4.75% in 2022, a reduction from the prior maximum of 6%. In addition, state taxpayers are no longer required to deduct federal income taxes from state income taxes.
Corporate income tax rate reduced in Nebraska
Nebraska began the process of reducing its corporate income tax rate in 2022, lowering the top marginal corporate tax rate to 7.5% from 7.81%. This will be a two-stage corporate tax rate reduction.
Income tax cut in North Carolina
The individual income tax rate in North Carolina is a flat rate — as opposed to the progressive tax rates seen at the federal level and in some other states. This flat rate was cut to 4.99% in 2022 from 5.25% in 2021, and the state has plans to continue reducing it to 3.99% by 2027.
Lowered income tax rate in Oklahoma
Taxpayers in Oklahoma may benefit from recent tax law reform in the state that created an across-the-board tax rate reduction of 0.25% This reduced the state’s top individual income tax rate to 4.75% from 5%.
New pass-through option in Oregon
Following the trend, Oregon also created an option for its S corporations, LLCs and partnerships to separate business income from personal income. Small businesses that make this election will face a 9% tax on income up to $250,000 and a 9.9% tax on any additional income.
New tax on long-term net capital gains in Washington
Taxpayers in Washington are facing a possible 7% state tax on long-term net capital gains of more than $250,000, with the exception of gains from real estate, retirement savings accounts, livestock and timber. This law took effect in 2022, but it is pending litigation.
Increased income taxes in Washington, D.C.
Thus far, no states have increased state individual income taxes, but the District of Columbia did increase its taxes on residents. The jurisdiction increased the number and thresholds of its tax brackets, effectively raising tax rates on higher-income individuals.
Social Security benefits exempt from income tax in West Virginia
This year marks the completion of West Virginia’s plan to phase out the taxation of Social Security benefits as income. In 2022, 100% of Social Security benefits are exempt from taxation for qualifying taxpayers based on their federal adjusted gross income.
Plan for these 2022 state tax reforms:
— Lowered base income tax rates in Arizona.
— Corporate income tax rate reduced in Arkansas.
— New pass-through level in Colorado.
— Corporate income tax rate increased in Florida.
— New pass-through option in Georgia.
— New pass-through option in Illinois.
— Eliminated inheritance tax in Iowa.
— Lowered maximum income tax rate in Louisiana.
— Corporate income tax rate reduced in Nebraska.
— Income tax cut in North Carolina.
— Lowered income tax rate in Oklahoma.
— New pass-through option in Oregon.
— New tax on long-term net capital gains in Washington.
— Increased income taxes in Washington, D.C.
— Social Security benefits exempt from income tax in West Virginia.
More from U.S. News
How to Avoid IRS Tax Delays in 2022
Tax Prep Checklist: Collect These Forms Before Filing Your Taxes
Tax Refunds: Everything You Need to Know
15 Major State Tax Changes You Might Have Missed originally appeared on usnews.com
