October 1st, 2010 Sweeping Changes Made to 2011 Rhode Island Personal Income Tax Laws Published on Friday, October 1, 2010 Kevin Bickerstaff, Tax Specialist Beginning in 2011, the Rhode Island personal income tax system will dramatically change with revisions to tax rates, standard deductions, personal exemption, as well as the elimination of itemized deductions and changes to many Rhode Island tax credits. A breakdown of these adjustments is summarized below: Tax Rates Rhode Island personal income tax rates will be adjusted in 2011 so that taxable incomes of up to $55,000 are taxed at 3.75%; taxable incomes between $55,000 and $125,000 are taxed at 4.75%; and taxable incomes exceeding $125,000 are taxed at 5.99%. These tax brackets are effective for taxpayers who are filing single, married filing joint, married filing separate, head of household, qualifying widower, as well as for bankruptcy estates. Previous tax rates ranged from 3.75% to 9.90% with varying taxable income brackets dependent on filing status. The new tax rates bring much more uniformity to the tax computation. Please note that the alternative flat tax, which was 6.5% in 2009, is no longer applicable in 2011. Standard and Itemized Deductions Beginning in 2011, the basic standard deduction will increase for Rhode Island taxpayers. Taxpayers filing single or married filing separate are eligible for a $7,500 standard deduction. Taxpayers who are married filing a joint tax return or are a qualifying widow receive a standard deduction of $15,000, while head of household filers will receive a deduction of $11,250. In 2009, standard deductions had been $5,700 for single, $9,500 for married filing joint or qualifying widow, $4,750 for married filing separate, and $8,350 for head of household taxpayers. This increase is partly due to the fact that itemized deductions are also no longer allowable beginning in 2011. The 2011 standard deduction rates will begin to be phased out for taxpayers whose taxable income exceeds $175,000. Personal Exemptions Rhode Island taxpayers will see a small decrease in the personal exemption figure beginning in 2011. The personal exemption amount in 2009 had been $3,650. This figure is now reduced to $3,500 starting in 2011. Like the standard deduction exclusion, personal exemptions will also begin to be phased out for taxpayers whose taxable income exceeds $175,000. Tax Credits The number of allowable credits taxpayers will be eligible to use on their Rhode Island tax return will be reduced greatly beginning in 2011. Eligible 2011 tax credits include the earned income credit, property tax credit, child and dependent care credit, residential lead abatement credit, taxes paid to other states, historic structures credit, motion picture credit, and credit for contributions to scholarship organizations. Some of the more popular credits that will no longer be available in 2011 include the investment tax credit, jobs training credit, R&D credits, and the employment tax credit. Example of 2011 changes In 2009, Taxpayer A is a Rhode Island resident filing as a single taxpayer. A has $175,000 of adjusted gross income. A itemizes deductions which comprise of mortgage interest paid, state income taxes, charitable contributions, real estate taxes, and miscellaneous deductible expenses. Total itemized deductions are $40,000. A’s personal exemption, after phase-out, is $3,553 resulting in Rhode Island taxable income of $131,447. Using the 2009 tax rate brackets, RI tax liability is $8,467. Using the same scenario as above, except calculating Rhode Island tax in 2011, A has $175,000 of adjusted gross income. A takes the $7,500 standard deduction since they can no longer itemize deductions in RI. A’s personal exemption in 2011 is now $3,500, resulting in Rhode Island taxable income of $164,000. Using the 2011 tax rate brackets, RI tax liability is now $7,724. While A’s taxable income is higher in 2011 due the changes in deductions, taxpayer A’s tax liability is reduced by $743 because of the decrease in overall tax rates. Depending upon the level of your income and deductions, the changes to the RI income tax can possibly reduce or increase your Rhode Island income taxes. In this example, if the taxpayer previously had an additional $10,000 in itemized deductions in 2009, he/she would have faced a higher tax in 2011 due to the loss of his/her itemized deductions. For more information or questions about the changes made to 2011 Rhode Island Personal Income Tax Laws, please contact your SK&Co tax professional at 401-331-0500 or firstname.lastname@example.org.