Tax changes in DC mean tax changes in Wisconsin

While a lot of the discussion about this week's extraordinary session at the State Legislature will be about services to deal with COVID-19, there also could be plenty of changes in the Wisconsin tax code,
as the Legislative Fiscal Bureau pointed out last week.

Much of this is a result of the stimulus bills passed in DC that would automatically change how much the state takes in, and require no legislative action. The largest is a significant change intended to reduce taxes for seniors by not having them have to take money out of their IRAs and 401k’s.

Under federal law, each employee's interest in a qualified retirement trust must generally begin to be distributed not later than the "required beginning date", which is generally defined as April 1 following the calendar year in which the employee reaches age 72 (70 and a half for individuals that reach the age of 70 and a half prior to January 1, 2020). After the first year, this required minimum distribution must be made by December 31 for each calendar year. The Act specifies that these required minimum distribution provisions do not apply for calendar year 2020 for certain defined contribution plans, or for an individual retirement plan, as established under federal law. It is estimated that this provision will reduce state individual income tax revenues by $34.0 million in 2019-20 and $41.0 million in 2020-21. However, it is estimated that income tax revenues will increase after 2020-21. A taxpayer's required minimum distribution is primarily based on the balance in their retirement account in the most recent calendar year. To the extent that waiving taxpayers' required minimum distributions in calendar year 2020 leads to higher aggregate account balances in succeeding years, the taxable distribution amounts in future years would be higher than under current law. The resulting estimated fiscal effect is an increase in individual income tax revenues of $6.0 million in 2021-22 and in 2022-23.

The other 2 items that will make a notable change to state finances without the Legislature doing anything are as follows:

1. Extending tax deadline to July 15, 2020. -$28.0 million in 2019-20, because it assumes many people will not file/pay taxes until after the July 1 start of the Fiscal Year.

2. Employers not having to make required minimum contributions to pensions in 2020 +$12.3 million 2019-20, +$14.2 million 2020-21. There's a write-off for employers to make this contribution, but it's an expense as well, and not having to pay it may be a nice break for them in these tough times. But it also could underfund those pensions down the road, so keep an eye on that one and how it affects workers now and in the future.

I also wanted to include the LFB’s breakdown of one major program that’s recently been in the news, which is intended to stabilize things in these disruptive times for many businesses.

In order to assist businesses and their employees during the COVID-19 pandemic, the Act provides $349 billion for paycheck protection loans under the small business administration's (SBA) Section 7(a) loan guarantee program available for the period of time from February 15, 2020, through June 30, 2020 (the "covered period"). Paycheck protection loan funds may be used to cover: (a) payroll expenses; (b) costs related to group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (c) mortgage payments; (d) rent; (e) utility bills; and (e) other debt service obligations incurred before the covered period. Loans will be disbursed via the network of banks participating in the SBA's current Section 7(a) loan program, and, eventually, through other lenders determined by the SBA and the Secretary of the U.S. Treasury.

A portion of paycheck protection loans may be forgiven on a tax-free basis equal to the sum of payments for payroll expenses, mortgage payments, rent, and utility bills made during the eight week period beginning on the date the loan was issued, not to exceed the principal amount of financing made available under the covered loan. The amount of loan forgiven may be reduced if the recipient does not maintain certain employment and wage thresholds specified in the Act. The amount of the loan forgiven is considered canceled debt income and excluded from federal gross income by the lender. The amount of loan forgiven that would otherwise be included in gross income of the eligible recipient is excluded from federal gross income under the Act.

But because the PPLs are part of a new law, there is no similar rule that would take this canceled debt “off the books” at the state level, which means the Legislature would have to pass a law to allow this to be deducted at the state level.

It would seem to be a dick move to make a struggling small business owner in Wisconsin have to pay taxes on this type of canceled debt, but the LFB notes that if the Legislature does nothing, the state would add $114 million in the 2020 Fiscal Year, and $102 million in the next one. Given that we may have a significant budget hole opening up, any source of income might be under consideration (but I sure wouldn’t choose this one).

Another couple of choices that need to be made involve charitable deductions. Many people (quite a few of whom live in Wisconsin) have not been able to write off their charitable contributions at the Federal level because of the higher standard deduction that came with 2017's GOP Tax Scam from DC. This provision would let those people take at least a small deduction.

The starting point for determining Wisconsin taxable income is federal adjusted gross income (federal AGI). To arrive at federal AGI, several additions and subtractions are made to an individual's gross income. The Act creates an additional subtraction by allowing up to $300 of qualified charitable contributions to be deducted from gross income in tax year 2020.

This is what's known as an "above-the-line" deduction, the "line" being line 8b of your form 1040

That's in contrast to the "below-the-line" contributions, where charitable contributions exist in the 2019 tax return.

As mentioned, because the state and local tax (SALT) deduction is capped at $10,000 total whether you're a married couple filing, or if you're a single person, this means a lot of people take the $24,400 they can write off as their standard deduction instead of using charity, mortgage interest, and SALT. This is especially true in Wisconsin, which relies on a state income tax and property taxes.

On the flip side, if a lot of a person's or business's income goes toward charitable contributions in 2020 (likely because you're retired and don't have all that much income), more of that can be written off below the line. And if the Legislature votes for this, they'd likely cut revenues for this budget, but have more coming in for what looks to be a rough 2021-23 budget.

Federal law generally provides that an individual may deduct qualified charitable contributions equaling up to 50% of the taxpayer's federal AGI in that tax year (or 60% for cash contributions made between tax years 2018 to 2025). The Act permits qualified charitable contributions made in calendar year 2020 up to 100% of the taxpayer's federal AGI. Any amounts exceeding the taxpayer's federal AGI may be carried over to the next five taxable years.

For qualified contributions, the Act increases the limitation on the deduction for charitable contributions by corporate taxpayers from 10% of adjustable taxable income to 25%. Any amounts exceeding this limit may be carried over to the next five taxable years. Similar to current law, the current year contribution is deducted first with carryover contributions applied in chronological order.

....The provision is estimated to reduce state income and franchise tax revenues by $3.2 million in 2019-20 and $25.7 million in 2020-21. However, income and franchise tax revenues are expected to increase by $14.4 million in 2021-22 and by $4.4 million in 2022-23 because increasing the limitation on the deduction in 2020 will reduce the amount that would otherwise carry forward to be used over the next five years.

I still haven't seen an agenda for what is supposed to be discussed at next week's session, and as you can see, just the tax provisions alone are worthy of a lot of examination. Now throw in the rapidly shifting expense side, and we're basically back to a brand new budget debate less than 1 year after the adoption of the last one.