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Critical State Income Tax Changes for 2022

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Critical State Income Tax Changes for 2022

Income Tax by State

Most states have passed tax legislation in 2022 that will affect their 2022 income tax returns. This article provides a brief description of the 2022 state income tax changes for each State.

State Tax Changes for 2022

Alabama

  • Optional standard deduction is changed as follows:
    • AGI income floor is increased for single, married filing joint, or head of household to $25,500 and $12,750 for married filing separate.
    • Standard deduction is increased as follows:
      • Married filing jointly – Minimum: $5,000; Maximum: $8,500
      • All other filing status’ – Minimum: $2,500; Maximum: $4,250
  • Income threshold for the maximum dependent exemption is increased to $50,000.
  • For taxpayers 65 or older – The first $6,000 of taxable retirement income is exempt from Alabama income tax.

Arkansas

  • The top individual income tax rate has been reduced to 5.5%.
  • Low-income and middle-income tax tables have been consolidated.
  • Added an up to $60 nonrefundable credit for low-income individuals. The maximum income to receive the credit is $24,700.
  • Standard deduction will begin to be adjusted for inflation each year.
  • Unemployment benefits will be taxable in 2022.
  • New Pass-Through Entity Tax
    • Partnerships, S Corporations, or a limited liability company with one or more members may elect to pay a 5.9% flat tax on their net Arkansas business taxable income.
    • The election must be made on an annual basis and must be approved by business owners holding more than 50% of the voting rights in the business.
    • An entity makes the election by completing and filing Form AR362 (Arkansas Pass-Through Entity Income Tax Election or Revocation Form).

Arizona

  • Individual income tax rates are now: 2.55% (Taxable income under $27,272); 2.98% (Taxable income $27,273 – $250,000); 4.5% for taxable income over $250,000.
  • New Pass-Through Entity Tax
    • Partnerships and S Corporations may elect to pay a 4.5% flat tax on their Arizona business taxable income.
    • The election must be made on an annual basis. Partners or shareholders may opt-out of the election.
    • Partners or Shareholders are allowed to claim a Credit for Entity Level Income Tax on their individual income tax return. The amount of credit is the pass-through entity tax that is attributable to the partner or shareholder’s share of income taxable in Arizona.

California

  • The tentative minimum tax limitation was eliminated when calculating the tax for a Pass-Through Entity that elects to be taxed at the entity level. This is both for the tax and the PTE credit. This change is retroactive to Tax Year 2021.
  • For the Pass-Through Entity Tax, the following now applies (retroactive to 2021):
    • Qualified net income for calculating the tax now includes a qualified taxpayer’s guaranteed payments received from the entity.
    • A partnership now qualifies as a direct owner.
    • A qualified taxpayer can be a disregarded single member limited liability company, as long as it is solely owned by an individual, fiduciary, estate or trust subject to California personal income tax.

Colorado

  • Colorado allows 50% of business meals to be deductible. Therefore, any amount above 50% taken on the federal return must be added back to Colorado taxable income.
  • Colorado Earned Income Tax Credit is now 20% of federal EITC.
  • Colorado Child Tax Credit will now be available to individuals as a percentage of the federal child tax credit as follows:
    • Single filers
      • 60% if federal AGI is $25,000 or less
      • 30% if federal AGI is between $25,001 and $50,000
      • 10% if federal AGI is between $50,001 and $75,000
      • No credit allowed if AGI is over $75,000
    • Married filing joint filers
      • 60% if federal AGI is $35,000 or less
      • 30% if federal AGI is between $35,001 and $60,000
      • 10% if federal AGI is between $60,001 and $85,000
      • No credit allowed if AGI is over $85,000
  • Colorado capital gain exclusion is now only available to taxpayers with farming activity reported on the Federal Schedule F with qualified capital gains.
  • Colorado will limit federal itemized deductions allowed for Colorado purposes for taxpayers with federal AGI of $400,000 or more. Itemized deductions will be limited to $30,000 ($60,000 for MFJ) if the taxpayer’s federal AGI is $400,000 or more.
  • Qualified early childhood educators may be eligible for a new income tax credit. The credit is based on the individual’s credentialing and employment.
  • For Tax Year 2022 only, seniors aged 65 and older with an AGI of $75,000 or less will be eligible for a credit if they did not receive the Colorado senior homestead property tax exemption.
  • New Pass-Through Entity Tax
    • Partnerships, S Corporations, and LLCs taxed as partnerships may elect to pay a 4.55% flat tax on their Colorado business taxable income.
    • The election must be made on an annual basis and it is binding on all of the pass-through entity’s owner. The election is made by checking a box on the entity’s applicable Colorado state income tax return.

Connecticut

  • All pension and annuity earnings are now exempt from Connecticut income tax.
  • The property tax credit increased to $300 and expanded the number of taxpayers eligible to claim it.
  • Added new credit for still births – Credit is $2,500.
  • Expands the loans eligible for the student loan payment tax credit for small businesses (businesses with gross receipts of less than $5 million). The credit is now a refundable credit.
  • For more details, see the 2022 Connecticut Tax Developments page on the Connecticut Department of Revenue Services.

District of Columbia

  • Increased the number of tax brackets from 6 to 7 and altered many thresholds.

Georgia

  • New Pass-Through Entity Tax
    • Partnerships and S Corporations can elect to tax business income at 5.75%.
    • Entity can make the election by checking a box and completing the applicable schedules for Form 600S for S Corporations or Form 700 for partnerships.
    • The election is to pay state tax at the entity level rather than by the individual partner or shareholder. The entity will pay a 5.75% tax on its Georgia taxable income.  The election is binding on all owners.
  • Now conforms to Internal Revenue Code as of Jan. 1, 2022.

Hawaii

  • Now conforms to Internal Revenue Code as of December 31, 2021.
  • Hawaii Earned Income Tax Credit has been made permanent and is now refundable.

Idaho

  • Number of tax brackets is reduced to four. The top tax rate will be 6% and apply for taxable income of $5,000 and above. The tax brackets will be 1%, 3%, 4.5%, and 6%.
  • Corporate income tax rate is reduced to 6%.

Illinois

  • Illinois EITC – Percentage for 2022 is 20% of the federal credit amount. Expanded eligibility to persons 18-25 and 65 or older.

Indiana

  • Business meals are 50% deductible for Indiana income tax purposes.
  • Reminder: The federal non-itemizer charitable contribution is not allowed for Indiana income tax purposes.
State Income Tax

Kansas

  • Pass-Through Entity Tax beginning in 2022
    • Partnerships and S Corporations may elect to be taxed at 5.7% on the entity’s Kansas taxable income.
    • Election is made on the entity’s yearly tax return and is binding on all owners of the entity.
    • Partners or Shareholders are entitled to a credit for their direct share of the tax paid by the entity.
  • New tax credit of up to $250 is available to teachers for school and classroom supplies.
  • New non-refundable tax credit is available to donors to Kansas technical colleges and community colleges. Applies to contributions made after July 1, 2022 and for Tax Years 2023 – 2026.
  • Kansas Taxpayer Protection Act went into effect at the beginning of 2022. Paid preparers must include their PTIN on every return they prepare. Failure to do so could result in a $50 civil penalty for each return that does not include a PTIN. A paid preparer under this Act does not include CPAs.

Louisiana

  • Taxpayers may no longer deduct their federal tax liability in the calculation of Louisiana taxable income.
  • Reduced all individual income tax rates. Rates are now 1.85%, 3.5%, and 4.25%.
  • The Excess Federal Itemized Personal Deduction is limited to medical expenses.
  • Corporate tax rate will be 7.5%.

Maine

  • Up to $25,000 of retirement income is now exempt from Maine income tax. This amount will increase each year through 2025.
  • Property Tax Fairness credit – Resident taxpayers who pay more than 4% of their income on property taxes or rent will be eligible for a refundable tax credit of up to $1,000 ($1,500 for seniors).
  • Maine Earned Income Tax Credit – 25% of the federal EITC for Maine taxpayers with eligible children and 50% of the federal EITC for Maine taxpayers without children.
  • Education Opportunity Credit – provides an annual $2,500 or up to $25,000 lifetime refundable credit for student loan debt relief.

Maryland

  • A nonrefundable credit is available for taxpayers 65 or older and whose federal AGI is less than $100,000 ($150,000 for MFJ). The credit is $1,000 for an individual filer or for a married couple where only one is 65 or older. The credit is $1,750 for a joint return where both spouses are 65 or older.
  • Nonrefundable Work Opportunity Credit has been created. The credit is 50% of the federal Work Opportunity Credit that an employer claims for a qualified employee that works in Maryland.

Mississippi

  • Completed the phase-out of the 3 percent individual income tax bracket. This effectively eliminates tax on the first $5,000 of taxable income. It assesses a 4% tax on the next $5,000 and 5% tax on all taxable income above $10,000.

Montana

  • Highest tax rate is now 6.75%. The other six tax rates will remain the same.
  • Eliminated the following tax credits that were applicable to individuals:
    • Adoption Credit
    • Elderly Care Credit
    • College Contributions Credit
    • Alternative Fuel Conversion Credit
    • Alternative Energy System Credit
    • Alternative Energy Production Credit
    • Geothermal System Credit

Nebraska

  • Federal taxable Social Security benefits – For 2022, a deduction of 20% of federal taxable Social Security benefits is allowed against federal AGI on the Nebraska individual income tax return. Taxpayers can claim either the percentage deduction or the previously existing exemption for low-income recipients, whichever is greater.
  • Military retirement benefits are excluded from Nebraska income tax to the extent they are included in federal AGI.
  • New $2,000 refundable credit may be claimed by a parent of a stillborn child in the year the stillbirth occurred.
  • Beginning in 2022, fire fighters that receive cancer benefits under the Firefighter Cancer Benefits Act can subtract any benefit that is included in federal AGI from Nebraska AGI.
  • Corporate tax rate for Nebraska taxable income in excess of $100,000 is reduced to 7.5%.
  • See the 2022 Nebraska Legislative Changes page on the Nebraska Department of Revenue website for more details.

New Jersey

  • Created a fully refundable Child Tax Credit of up to $500 per child under 6 beginning in 2022. Taxpayers with ITINs will also be eligible for this credit. The credit will be based on income as follows:
    • $500: Income under $30,000
    • $400: Income of $30,000 – $40,000
    • $300: $40,000 – $50,000
    • $200: $50,000 – $60,000
    • $100: $60,000 – $80,000

New Mexico

  • Created a refundable Child Tax Credit per eligible child as follows:
    • $175 – AGI $25,000 or less
    • $150 – AGI $25,000 – $50,000
    • $125 – AGI $50,000 – $75,000
    • $100 – AGI $75,000 – $100,000
    • $75 – AGI $100,000 – $200,000
    • $50 – AGI $200,000 – $350,000
    • $25 – AGI over $350,000
  • Military retiree’s pension income – First $10,000 is exempt from tax.
  • Social Security Income will be exempt from tax for taxpayers with AGI that is less than:
    • $100,000 – Single
    • $150,000 – MFJ
    • $75,000 – MFS
  • Qualified nurses are eligible for a refundable tax credit of $1,000.
  • A one-time rebate of $250 for filers earning less than $75,000 and $500 for married couples earning less than $150,000.

New York

  • Small Business Subtraction is increased to 15%. This subtraction is available to:
    • Sole proprietors with one or more employees and less than $250,000 of net business income or net farm income.
    • Owners of New York S Corporations and tax partnerships with one or more employees and less than $1.5 million of New York gross business income attributable to a non-farm business.

North Carolina

  • Individual income tax rate was reduced to 4.99%.
  • Standard deduction is increased for all filing statuses as follows:
    • $25,500 – Married Filing Jointly
    • $12,750 – Single
    • $19,125 – Head of Household
    • $12,750 – Married Filing Separate
  • North Carolina child deduction is increased by $500 for each qualifying child.
  • Military retirees that had at least 20 years of service or were medically retired can exclude their military retirement pay from North Carolina taxable income.
  • New Pass-Through Entity Tax
    • Partnerships and S Corporations may elect to pay a 4.99% flat tax on their North Carolina business taxable income.
    • Partnerships may only make the election if all of their partners are individuals, estates, trusts, or certain exempt organizations.
    • An entity can make the election on their North Carolina income tax return.
    • The election must be made on an annual basis.
    • Each resident partner or shareholder is allowed a credit of their distributive share of the tax paid by the entity.
  • Now conforms to the Internal Revenue Code as of April 1, 2021.

North Dakota

  • Reminder – Tax Relief Income Tax Credit is applicable for 2022. The credit is available to full-year residents of North Dakota for 2022. The credit is $350 (MFJ – $700).
  • Social Security Benefit exclusion is now available to all individuals regardless of their adjusted gross income.  All taxpayers who receive Social Security Benefits may deduct the federal taxable portion of their Social Security Benefits from North Dakota taxable income.

Ohio

  • New Pass-Through Entity Tax (Effective beginning for Tax Year 2022)
    • Partnerships and S Corporations may elect to pay a 5% tax on their Ohio business taxable income.
    • Entity must make an annual election. Ohio Department of Taxation will be issuing guidance on how the entity makes the election.
    • Allows a shareholder or partner to claim a refundable credit on their individual income tax return equal to the PTE owner’s proportional share of the tax imposed on the electing entity.

Oklahoma

  • Top individual tax rate is now 4.75%.
  • Oklahoma earned income tax credit is fully refundable. The Oklahoma earned income tax credit is 5% of the federal EITC.
  • Corporate income tax rate is now 4%.
  • Allows taxpayer to elect 100% bonus depreciation on eligible “qualified property” or “qualified improvement property”. What is included in qualified property is the same as under IRS Section 168 as of January 1, 2021. This is for property placed in service beginning in 2022.
  • Conforms to federal Sec. 179 deduction for corporations for tax years beginning after December 31, 2021.

Oregon

  • New Pass -Through Entity Tax:
    • S Corporations and partnerships may elect to pay a tax (Oregon PTE-E tax) on their Oregon business taxable income. The tax is at 9% on the first $250,000 and 9.9% on taxable business income above $250,000.
    • The tax is paid by the Partnership or S Corporation.
    • Shareholders and partners are eligible for a credit on their individual Oregon returns equal to 100% of the member’s distributive share of pass-through entity tax paid.

South Carolina

  • Individual tax rates and income tax brackets will change for 2022. The top marginal tax rate will be 6.5%.
  • All military retirement income is exempt from South Carolina income tax.

Utah

  • Tax rate is reduced to 4.85%.
  • Nonrefundable credit for social security benefits:
  • Federal taxable amount of Social Security benefits x 4.85%
  • Credit begins to phase out when the taxpayer’s AGI reaches:
    • $37,000 – Single
    • $62,000 – Married filing joint/head of household
    • $31,000 – Married filing separate
  • Nonrefundable Earned Income Tax Credit – Credit is 15% of federal EIC

Vermont

  • The Child Tax Credit will be refundable and provides a $1,000 credit for each child under 6. Phase-out of credit begins at $125,000 of AGI. Completely phased-out at AGI of $175,000.
  • A new deduction for student loan interest payments is now available to Vermont taxpayers with AGI of $120,000 or less ($200,000 for MFJ).
  • Increases the income eligibility thresholds for the Social Security benefits exclusion by $5,000. Taxpayers eligible for the exclusion are:
    • Single taxpayers with AGI below $50,000
    • Joint filers with AGI below $65,000
  • Vermont EITC is increased to 38% of federal EITC.
  • Tax credit for child care and dependent care – Vermont credit is now 72% of the federal credit and is fully refundable.
  • Creates a new exclusion for first $10,000 for military pension benefits, Civil Service Retirement System or other retirement income from systems not covered by Social Security. Income thresholds are same as for Social Security benefits.
  • For more details, see the 2022 Legislative Highlights page on the Vermont Department of Taxes website.

Virginia

  • Standard deduction will increase to $8,000 for single filers and $16,000 for married filing joint filers. This is provided that certain revenue targets are met. If not, the standard deduction will increase to $7,500 for single filers and $15,000 for MFJ.
  • Virginia Earned Income Tax Credit will now be fully refundable. The Virginia EITC is 15% of the federal credit.
  • Individuals may claim a subtraction of up to $10,000 for qualifying military benefits.
  • Tax deduction for business interest is 30% of the business disallowed for federal purposes.
  • New Pass-Through Entity Tax
    • Effective for Tax Years 2021 – 2025
    • Partnerships and S Corporations may elect annually to pay a 5.75% of the entity’s Virginia taxable income.
    • Shareholders and partners are eligible for a credit on their individual Virginia tax returns equal to 100% of the member’s distributive share of pass-through entity tax paid.
  • Conforms to Internal Revenue code as of December 31, 2021. Virginia continues to not conform to the following federal provisions:
    • Bonus depreciation
    • Five-year carryback for certain net operating losses
    • Tax exclusions related to cancellation of debt income
    • The suspension of the federal limit on itemized deductions
    • The reduction of the medical expense deduction floor.
  • See New Virginia Tax Laws for July 1, 2022  on the Virginia Tax website for more details on these changes.

West Virginia

  • Social Security benefits are now exempt from income tax as long as the taxpayer’s federal adjusted gross income is $100,000 ($50,000 for Single filers) or less.

Wisconsin

  • New child and dependent care credit – 50% of the federal child and dependent care credit claimed on their federal return.

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