Tomorrow, it looks like the Joint Finance Committee is going to take on the Wisconsin GOP's tax cut package. I've already discussed a bit about the reduction from 5.3% to 4.4% for a large swath of Wisconsinites, and I instead want to concentrate about the provisions on retirement income.
The Legislative Fiscal Bureau says the retiree income exemption would end up costing nearly $1 bilion in the next 2 years, and the LFB describes how the retirement tax break would work.
Exclusion for Retirement Income. Beginning in tax year 2023, AB 386 would exclude the first $100,000 of retirement income currently subject to state tax received by each individual who is at least 67 years of age before the close of the taxable year. For married-joint filers where each spouse has attained age 67, the maximum exclusion would equal $150,000. For married-separate filers who have attained age 67, the exclusion claimed by each spouse could not exceed $75,000. [For comparison, the estimated average state-taxable retirement income under current law for individuals with retirement income in tax year 2023 is $37,530 for married-joint filers and $22,140 for all other filers.] The bill would prohibit a taxpayer who claims this exclusion from claiming any state income tax credits provided under current law in the same tax year...
Retirement income, for purposes of the exclusion, would be defined as payments or distributions received each year by an individual from a qualified retirement plan under the Internal Revenue Code under 26 USC 408 [such as distributions from a pension, 401(k), or 403(b)] or from an IRA established under specified provisions of federal law, which are generally subject to RMDs. The proposed exclusion would not apply to any retirement income which is already exempt under any of the aforementioned provisions of current state law (to prevent an exclusion from being claimed twice on the same income). Distributions from qualified after-tax retirement plans for which tax had already been paid (such as a Roth IRA, Roth 401(k), or Roth 403(b) plan) would not receive an additional tax benefit under the bill.
So we're talking about the richest retirees getting this tax break, especially when you remember what type of "reitree income" is already exempt from Wisconsin income taxes.
Under current law, the following retirement income categories are excluded from Wisconsin AGI: (a) Social Security benefits; (b) payments from the U.S. military employee retirement system and U.S. government retirement payments received by members of the U.S. Coast Guard, the Commissioned Corps of the National Oceanic and Atmospheric Administration, and the Commissioned Corps of the Public Health Service; (c) income from certain public retirement systems if the individual was a member of, or retired from, that system prior to 1964; and (d) up to $5,000 of retirement income for taxpayers aged 65 or over with federal AGI of less than $15,000 per filer or less than $30,000 for married-joint filers. Together, these provisions are estimated to reduce individual income tax revenues by nearly $950 million in tax year 2024 under current law (the exclusion for Social Security benefits accounts for an estimated $900 million [95%] of this total).
In addition to the regressive nature, I had not heard about that provision which says that taking this tax break for "retirement income" would make elderly taxpayers ineligible for other tax credits. Take a look at the list that the LFB included with their analysis.
Itemized deduction credit that gives you 5% back for things such as charitable donations and mortgage interest? Property tax credits? Homestead Credit? Property tax credits for veterans and surviving spouses? Is that worth writing off some IRA distributions for, or your investment income? Only if you make a lot of money.
This is why I'd like to see the upper limit of this retiree tax break reduced to $25,000 single/$50,000 for married-joint filers. And I bet it would reduce the price tag by quite a bit. I'd also like to see older Wisconsinites be able to use property and Homestead tax credits that are key for homeowners (and particularly elderly homeowners).
I'd also disassociate it from the reduction in income tax rates that is part of this bill, and separate both out. Perhaps that would help in getting some kind of compromise between the Legislature and Governor Evers, instead of blowing the entire surplus in 2 years. But I have a feeling that the WisGOPs are less interested in passing anything into law, and more into playing poser games that sound good to low-info voters.
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