Topic:
INCOME TAX;
Location:
TAXES - INCOME;

OLR Research Report


December 12, 2002

 

2002-R-0985

TAXABLE INCOME AND INCOME TAX RATES IN FIVE STATES

 

By: Judith S. Lohman, Chief Analyst

For Connecticut, Massachusetts, New Jersey, New York, and Rhode Island, you asked (1) what their personal income tax rates are, (3) what they include in taxable income, and (3) what tax deductions they allow.

SUMMARY

Of the five states, three (Connecticut, New Jersey and New York) have state income taxes with more than one tax bracket and two, Massachusetts and Rhode Island have flat taxes. Rates for top income brackets in 2002 range from a low of 4.5% (Connecticut) to a high of 6.85% (New York). For the lowest brackets, tax rates run from 1.4% in New Jersey to 5.3% in Massachusetts.

Rhode Island is the only one of the five that uses federal tax liability as the basis of its tax. The others use income. Connecticut, New York, and Rhode Island use federal adjusted gross income (AGI) as a starting point for figuring taxes and require taxpayers to add or deduct certain types of income from their federal figure. Massachusetts and New Jersey have no express federal starting points but instead incorporate full lists of income types and deductions into their taxable income definitions.

Information on income and deductions in this report is taken from each state's line-by-line instructions for filing a full-year resident return for either 2001 or 2002, depending on the most up-to-date form available.

INCOME TAX RATES, INCOME BRACKETS, AND PERSONAL EXEMPTIONS

The table below shows the tax rate ranges, numbers of brackets, lowest and highest income brackets, and the personal exemptions for the five states' income taxes for the 2002 tax year.

Table 1: Income Taxes in Five Northeastern States

STATE

% Tax Rate Range

# Brackets

Income Brackets (single filers)

Personal Exemptions

Low

High

 

Lowest

Highest

Single

Married

Dependent

CT

3.0

4.5

2

$10,000

$10,000

$12,750

$24,000

0

MASS

5.3

1

Flat

4,400

8,800

$1,000

NJ

1.4

6.37

6

20,000

75,000

1,000

2,000

1,500

NY

4.0

6.85

5

8,000

20,000

0

0

1,000

RI

25% of federal tax liability

None

NA

NA

Federal exemptions

Source: Federation of Tax Administrators, February 2002

INCOME, MODIFICATIONS, AND DEDUCTIONS

Federal Adjusted Gross Income

Taxpayers must report specific types of income on their federal tax returns. This income is then reduced by certain specified deductions to yield the federal adjusted gross income (AGI). Once determined, the federal AGI is further reduced by personal exemptions and itemized deductions for such things as home mortgage interest, tax payments to other jurisdictions, and charitable contributions, to yield federal taxable income. The income and deductions used to calculate federal AGI for the 2002 tax year are shown in Table 2.

Table 2: Federal Adjusted Gross Income

GROSS INCOME

DEDUCTIONS

n Wages, salaries, and tips

n Taxable interest

n Ordinary dividends

n Taxable refunds, credits, or offsets of state and local income taxes

n Alimony received

n Business income (or loss)

n Capital gains (or losses)

n Other gains (or losses)

n IRA distributions

n Pensions and annuities

n Rental real estate, royalties, partnerships, S corporations, trusts, etc.

n Farm income (or loss)

n Unemployment compensation

n Social Security benefits

n Other income

n Educator expenses

n IRA deduction

n Student loan interest deduction

n Qualifying tuition and fees

n Archer medical savings account contribution

n 50% of self-employment tax

n Self-employed health insurance expenses

n Self-employed SEP, SIMPLE, and qualified plan expenses

n Penalty on early withdrawal from IRAs

n Alimony paid

Source: U.S. Tax Form 1040 (2002)

Connecticut and New York

The starting point for taxable income in Connecticut and New York is a taxpayer's federal AGI. Each state requires taxpayers to modify their federal AGI by adding and deducting various types of income to calculate their Connecticut and New York AGIs, which serve as the bases for their respective state income taxes.

Connecticut's and New York's federal AGI modifications are shown in Tables 3 and 4. Highly specialized modifications, such as those for S corporations; depreciation adjustments; and, in New York, adjustments for past differences between the state and federal tax systems, are described only in general terms.

Table 3: Connecticut Modifications to Federal AGI

ADDITIONS

DEDUCTIONS

n Interest on non-Connecticut state and local government obligations

n Exempt-interest dividends from a mutual fund derived from above

n Pro-rata share of certain S corporation losses (applies only to shareholders of S corporations that were subject to state corporation tax in 2000 and that have a federal taxable year other than a calendar year)

n Taxable lump-sum distributions from qualified plans not included in federal AGI

n Taxpayer's share of any Connecticut modifications that apply to income from an estate or trust (“fiduciary adjustment”)

n Loss on sales of Connecticut state or local government bonds

n Federally reportable treaty income

n Certain losses or deductions of an enrolled member of the Mashantucket Pequot Indian Tribe living in Pequot country

n Connecticut income tax deducted on federal return to arrive at federal AGI

n Expenses paid or incurred for production or collection of income exempt from Connecticut income tax that were deducted on federal return to arrive at federal AGI

n Amortizable bond premiums producing interest income exempt from Connecticut income tax, if the premiums were deducted to arrive at federal AGI

n Interest or dividend income on obligations of a U.S. entity that federal law exempts from federal, but not state, income taxes

n For income tax years starting January 1, 2002, federally deductible bonus depreciation allowance on certain property acquired between September 10, 2001 and September 10, 2004 and placed in service before January 1, 2005

n Interest on federal obligations

n Dividends from qualifying mutual funds derived from federal obligations

n Exempt Social Security income (up to 100% depending on income)

n State and local income tax refunds

n Tier I and II railroad retirement benefits and supplemental annuities

n Pro rata shares of certain S corporation income (applies only to shareholders of S corporations that were subject to state corporation tax in 2000 and that have a federal taxable year other than a calendar year)

n Taxpayer's share of any Connecticut modifications that apply to income from an estate or trust

n Gain on sales of Connecticut state or local government bonds

n Federally taxable distributions received as a designated beneficiary from the Connecticut Higher Education Trust

n Certain income or gains of an enrolled member of the Mashantucket Pequot Indian Tribe living in Pequot country

n Qualifying, federally taxable, Holocaust settlement payments

n Federally taxable interest earned on funds deposited in a Connecticut individual development account

n Interest paid on indebtedness incurred to acquire investments that provide Connecticut taxable but federal tax-exempt income, if not deductible in determining federal AGI and attributable to the taxpayer's trade or business

n Amortizable bond premiums producing interest or Connecticut taxable income, if the premiums are not deductible to determine federal AGI and are attributable to the taxpayer's trade or business

n Federally taxable interest on Connecticut state bonds or obligations

Source: 2001 Form CT-1040 – Connecticut Resident Income Tax Return and Instructions

Table 4: New York Modifications to Federal AGI

ADDITIONS

SUBTRACTIONS

n Interest on non-New York state and local government obligations

n Certain New York public employee retirement contributions

n Nonqualfied withdrawal from a NY state college choice tuition program

n Interest or dividend income on obligations of a U.S. entity that federal law exempts from federal, but not state, income taxes

n Personal income or unincorporated business taxes deducted in determining federal AGI

n Expenses related to production of income exempt from NY state tax

n Special additional mortgage recording tax deducted in figuring federal AGI

n Certain special depreciation deductions taken on federal return

n Percentage depletion allowance for mines or other natural deposits claimed on federal return

n Adjustments for certain dispositions or sales of inherited property

n Adjustments for dispositions or sales of certain solar and wind energy systems

n Deferred capital gain on sales of qualifying investments in new New York businesses between 1982 and 1988

n Certain income attributable to safe harbor leases

n Various adjustments related to accelerated property depreciation between 1981 and 1984

n Various adjustments for S corporation shareholders

n Deductions and deferrals under New York City flexible benefits program

n Health insurance and welfare benefit fund surcharge applicable to members of certain New York City public pension funds

n Farmers' school tax credit deducted in figuring 2001 federal AGI

n Deferred gains on sales of investments in New York qualified emerging technology companies

n Income from federal and New York state and local government pensions

n Interest on U.S. bonds and mutual fund dividends derived from U.S. obligations

n Qualifying pension and annuity income, up to a maximum of $20,000

n Federally taxable College Choice Tuition Savings Program contributions and qualifying withdrawals

n Certain investment income from U.S. government agencies

n Certain railroad retirement income and railroad unemployment insurance benefits

n Certain investment income exempted by New York law

n Trade or business interest, bond premiums, or other expenses connected with federally tax-exempt income taxable in New York

n Certain expenses of professional service corporations

n Wage or salary expenses allowed as federal credits but not as federal expenses

n Sale or disposition of assets acquired before 1960 with greater state than federal bases

n Federally reportable income earned before 1960 previously reported to New York state

n Cost depletion of natural resource holdings

n Certain qualifying special depreciation expenses incurred before 1987

n Loss from sale of inherited property that would have been realized if a federal estate tax return had been required

n Various other specialized adjustments for depreciation, safe harbor leases, and capital gains from sales of qualifying investments

n Various adjustments applicable to S corporation shareholders

n Qualifying disability income

n Federally taxable accelerated death benefits

n Contributions for executive mansion, natural, and historical resources not deducted elsewhere

n Long-term care fees up to certain maximums, depending on age

n Distributions to Nazi persecution victims

n Income related to assets stolen or hidden from, or otherwise lost to, a Nazi persecution victim

n Deferred capital gain on sale of qualified emerging technology investments

Rhode Island

Like Connecticut and New York, Rhode Island uses federal AGI as the starting point of its state income tax and it allows certain modifications to federal AGI in figuring state taxable income (see Table 5). But instead of applying the tax rate to the resulting state adjusted gross income, Rhode Island calculates state taxable income as shown below:

Federal AGI (from federal tax return) +/- net modifications to federal AGI, if any = Modified federal AGI

(Modified federal AGI - federal deductions) - federal exemption amount = RI taxable income

Table 5: Rhode Island Modifications to Federal AGI

ADDITIONS

SUBTRACTIONS

n Interest on non-Rhode Island state and local government obligations

n Rhode Island fiduciary adjustment as beneficiary of estate or trust

n Income distributed to a resident trust beneficiary on which the trust grantor has already paid federal taxes but that was not taxable as investment income under an earlier state law

n Interest on loans incurred or continued to buy or carry obligations or securities whose income is exempt from state income tax, to the extent the interest had been deducted in determining federal AGI or taxable income

n Nonqualifying distributions from Family Education Accounts

n For income tax years starting January 1, 2002, federally deductible bonus depreciation allowance on certain property acquired between September 10, 2001 and September 10, 2004 and placed in service before January 1,2005

n Income from U.S. obligations includable in federal AGI but exempt from state income taxes

n Rhode Island fiduciary adjustment as beneficiary of estate or trust

n Interest or dividend income on obligations of U.S. entity includable in federal AGI but exempt from state income taxes under federal law

n Elective deduction for new research and development facilities

n Certain federally taxable railroad retirement benefits

n Qualifying investment in a certified capital venture partnership

n Family Education Account qualifying distributions

n Exemptions from tax on profit or gain for writers, composers, and artists creating works or art while living in defined zones in Pawtucket, Providence, and Westerly

Source: New York Form IT-201-I- Instructions for Resident Income Tax Return (2002)

MASSACHUSETTS AND NEW JERSEY

These states do not explicitly tie their definitions of income and their deductions to a federal income tax starting point. Instead, they require taxpayers to report specific types income and allow a list of specific deductions. But in both states, many types of reportable income and deductions are the same or similar to federal ones.

Table 6: Massachusetts Income and Deductions

INCOME

DEDUCTIONS

n Wages, salaries, tips, and other employee compensation

n Taxable pensions and annuities

n Interest from Massachusetts banks

n Other interest and dividend income

n Capital gains (from U.S. Form 1040, Schedule D)

n Business/professional or farm income or loss

n Rental, royalty, REMIC (real estate mortgage investment conduit), partnership, S corporation, or trust income or loss

n Unemployment compensation

n Alimony received

n Taxable IRA/Keogh and Roth IRA conversion distributions

n Massachusetts state lottery winnings

n Other gambling winnings

n Amounts paid to Social Security, Medicare, Railroad, U.S. or Massachusetts retirement systems

n Child under 13, or disabled dependent or spouse, care expenses

n $2,400 ($4,800 for two or more) for dependent household members under age 12 or dependents age 65 (other than taxpayer or spouse), or disabled dependent

n If qualified, 50% of rent paid (maximum $3,000)

n Allowable trade or business expenses

n Allowable employee business expenses

n Penalty on early savings withdrawal

n Alimony paid

n Income to a police officer or firefighter incapacitated in the line of duty

n Income exempt under U.S. tax treaty

n Student loan interest deduction

n Medical savings account deduction

n Moving expenses

n Self-employed health insurance deduction

n Certain qualified deductions from federal Form 1040

n Deductible amount of qualified contributory pension income from another state or political subdivision

n College tuition deduction

n Undergraduate student loan interest deduction (amount not claimed above)

n Charitable contributions deductions

n Abandoned building renovation deduction

n Child care deduction and dependent care benefits

n Contributions to qualified retirement plan by S corporation shareholder-employees

n Short- and long-term capital gain and loss offsets and carry forwards

n Jury duty pay remittance miscellaneous deduction

n Repayment of supplemental unemployment benefits miscellaneous deduction

Source: 2001 Massachusetts Resident Income Tax Form 1

Table 7: New Jersey Income and Deductions

INCOME

DEDUCTIONS

n Wages and other compensation

n Interest and dividends

n Net business profits

n Net gains or income from disposition of property

n Pensions, annuities, IRA withdrawals, excluding certain military pensions or survivors' benefits. Part of pension income is excluded for those aged 62 or over or permanently disabled. Exclusion limits depend on filing status.

n Distributive share of partnership income

n Net pro rata share of S corporation income

n Net gains or income from rents royalties, patents, and copyrights

n Net gambling winnings

n Alimony received

n Amounts received as prizes and awards

n Income in respect of a decedent

n Income from trusts and estates

n Taxable scholarships and fellowships

n Employer-paid residential rental value or allowance

n Other income (from legal and illegal sources)

n Personal exemptions

n Qualifying medical expenses

n Qualified medical savings account contributions

n Self-employed health insurance costs

n Alimony paid

n Qualified contributions toward purchasing New Jersey property for conservation

n Property tax deduction/credit – deduction from taxable income of total property taxes paid on a principal residence or $10,000 whichever is less, or a $50 refundable credit

Source: 2001 Form NJ-1040, Line by Line Instructions

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