Illinois Raises Tax Rates - Will Iowa Benefit?

Illinois has announced that it will enact major increases to its tax rates.  Will Iowa benefit?  My friends at Radio Iowa have a story about this possibility.

The founder of sandwich company Jimmy John's, based in Champaign, Illinois, has already said he might move his company to Florida because of the rate hike.

Tax Headaches for Same-Sex Couples in California, Nevada and Washington

The New York Times has a good article about the tax headaches faced by same-sex married couples in California, Nevada and Washington, where special "community property rules" apply.  An IRS ruling in 2010 allows same-sex married couples in those states to calculate their federal taxes in the same was as opposite-sex couples.  Most people considered the ruling a step forward for same-sex couples, but as the article points out, it is also a source of headaches and confusion.

I wrote two articles about the ruling in 2010.  Those articles can be found here and here.

Oops! Yale Payroll Error Costs Gay Employees

Yale University says it made a payroll error that resulted in under-withholding for 61 employees with same-sex partners.  Yale failed to withhold federal taxes on the value of domestic partner health insurance during 2010. 

Same-sex marriage is legal in Connecticut, where Yale is located, but the federal government does not recognize same-sex marriage.  The issue here is taxability of health insurance provided to a same-sex spouse.  Connecticut does not tax the value of such health insurance, but the federal government does.  A programming error in Yale's payroll system treated the health insurance as not taxable for both state and federal purposes, instead of just for state purposes, so federal taxes were not withheld on the value of the insurance.

The affected employees will see smaller paychecks in 2011, because they'll not only have "regular" withholding for 2011, but they'll also have the 2010 under-withholding withheld from their paychecks in 2011.

Read all about it in this New York Times blog.

Federal Tax Provisions and the State of Iowa

One of the considerations of tax planning is the impact of state taxes.  Many states follow along with most federal provisions for calculating income, but almost every state varies from federal law on at least a few items.  This is often referred to as "de-coupling" from federal law. 

For example, Iowa in 2009 "de-coupled" from federal law on Section 179 expensing and bonus depreciation.  Section 179 expensing was limited to $133,000 (as opposed to $250,000 on federal returns), and bonus depreciation was not allowed at all on Iowa returns.  (Read more about this tax issue in this article.)

Iowa often "de-couples" from other "extender" items such as the front-side deduction for college expenses and the front-side deduction allowed to K-12 teachers for out-of-pocket classroom expenses.  These were a part of the federal tax bill signed into law last week.  The Iowa legislature will decide next month on whether to de-couple from these items and not allow them to be deductible on Iowa tax returns.  It is a safe bet that the legislature will vote to de-couple on these items, and also on the increase in Section 179 and bonus depreciation.

One federal provision that Iowa is coupling with is the provision in the "health care bill" passed earlier this year that allows people to keep children on their health insurance through age 26.  The value of this insurance coverage will be tax-free for federal purposes, and Iowa has announced that it will go along with federal law in this case.  Read more in this informational post from the Iowa Department of Revenue.

Section 179 and Bonus Depreciation for Iowans

Following up on my last post about Section 179 expensing and bonus depreciation:  one other aspect of tax planning for asset purchases is to examine what your state's rules are.  Some states, such as Iowa, do not follow federal guidelines for either Section 179 or bonus depreciation.

For example, in Iowa, Section 179 expensing is capped at $134,000, and bonus depreciation is not honored at all.  If your federal Section 179 expense exceeds $134,000, you'll only be able to deduct $134,000 as Section 179 expensing on your Iowa return; the rest will have to be depreciated.  This means an Iowan  could easily have to track two sets of basis and two sets of depreciation schedules - one for the IRS and one for Iowa.

Iowa isn't the only state that does this.  For example, I prepared an Ohio tax return last year, and they have a strange "5/6" rule on bonus depreciation and Section 179 expensing.  The rule gets its name because you have to add back 5/6 of the bonus depreciation amount as income on your Ohio tax return.  And for Section 179 expensing, you have to compare the amount of Section 179 expensing in the current year with the amount that would have been allowable if it was still 2002 (when the 179 limit was $25,000).  Basically, you add back to income 5/6 of the dollar amount of Section 179 expensing in excess of $25,000.

Preparing this Ohio return opened my eyes to the fact that Iowa, while it rightfully ranks very poorly in tax friendliness, is not the only state with mystifying tax rules.