12 CSR 10-2.160 - State Income Tax Deduction Add-Back

PURPOSE: This rule lends guidance to taxpayers in determining the proportion of their state income taxes which must be added to Missouri adjusted gross income pursuant to section 143.141(1) and (2), RSMo.

(1) Background. Included in the Revenue Reconciliation Act of 1990 was a provision which required individuals with federal adjusted gross income over certain income thresholds to reduce the amount allowable for federal itemized deductions by three percent (3%) of the excess over that threshold (26 U.S.C. 68). Certain deductions such as medical expenses, investment interest and casualty, theft or wagering losses are not subject to this reduction. The threshold amounts are adjusted annually for inflation.

(2) Section 143.141, RSMo defines Missouri itemized deductions. This section allows a taxpayer who itemized at the federal level to elect to itemize at the state level. The state itemized deductions are those allowable by the federal government subject to certain modifications. One modification is that state income taxes included in federal itemized deductions must be subtracted to arrive at Missouri itemized deductions. Missouri does not allow state income taxes as an itemized deduction, where the IRS does allow state income taxes as an itemized deduction. Therefore, any state income tax included in federal itemized deductions must be eliminated to arrive at Missouri itemized deductions. For the remainder of this rule, this subtraction from federal itemized deductions will be referred to as an add-back. This term is used because when itemized deductions are decreased Missouri taxable income is increased. Hence, taxpayer is actually adding state income taxes to federal adjusted gross income to arrive at Missouri taxable income.

(3) House Bill 1155, passed during the 86th General Assembly, changed the language in section 143.141(1) and (2), RSMo. Previously, taxpayers were required to add-back all state income taxes regardless of any reductions at the federal level. This law changed the language regarding the state income tax add-back to read that Missouri itemized deductions, which begin with federal itemized deductions, must be reduced by the proportional amount of those deductions representing any income taxes imposed by this state, another state of the United States or a political subdivision of the United States or the District of Columbia. This law is effective for all tax years beginning on or after January 1, 1993. Under this new law, the amount of state income taxes added to Missouri adjusted gross income will be the ratio of state income taxes (numerator) over total reducible itemized deductions (denominator) multiplied by the total reduction in federal itemized deductions; this product is then subtracted from the pre-reduction total of state income taxes shown on the federal return.

(A) Example 1: Assume the federal threshold amounts are $100,000 for married filing joint and $50,000 for married filing separate. Taxpayer's filing status is married filing joint. federal adjusted gross income

(AGI) $250,000

Federal AGI in excess of $100,000 limit

$250,000 - $100,000 = $150,000

Three percent (3%) of amount in excess of $100,000 $150,000 × 3% = $4,500

Total itemized deductions $20,000

$10,000 of state income taxes (reducible) $10,000 in charitable contributions (reducible)

Allowable federal itemized deductions $20,000 - $4,500 = $15,500

Ratio of state income taxes to total reducible federal itemized deductions $10,000 ÷ $20,000 = 50%

Portion of reduction of federal itemized deductions attributable to state income taxes

$4,500 × 50% = $2,250

State income tax added back

(amount of allowable federal itemized deductions attributable to state income taxes)

$10,000 - $2,250 = $7,750

Missouri itemized deductions

$15,500 - $7,750 = $7,750

(B) Example 2: Assume the federal threshold amounts are $100,000 for married filing joint and $50,000 for married filing separate. Taxpayer's filing status is married filing joint. Taxpayer's federal adjusted gross income (AGI) is $80,000. Taxpayer has $30,000 in itemized deductions ($10,000 from each; state income taxes, charitable contributions and medical expenses). Because taxpayer's federal AGI is below $100,000, his/her federal itemized deductions will not be reduced. Therefore, in calculating Missouri itemized deductions, the full amount of state income taxes ($10,000) which were included in federal itemized deductions, must be added-back to arrive at Missouri itemized deductions ($30,000 - $10,000 = $20,000).

(C) Example 3. Assume the federal threshold amounts are $100,000 for married filing joint and $50,000 for married filing separate. Taxpayer's filing status is married filing joint.

Federal AGI $250,000

Federal AGI in excess of $100,000 limit

$250,000 - $100,000 = $150,000 Three percent (3%) of amount in excess of $100,000 $150,000 × 3% = $4,500

Total itemized deductions $30,000

$10,000 of state income taxes (reducible) $10,000 in charitable contributions (reducible)

$10,000 in medical expenses (not subject to reduction per 26 U.S.C. 68)

Allowable federal itemized deductions $30,000 - $4,500 = $25,500

Ratio of state income taxes to total reducible federal itemized deductions (medical expenses cannot be reduced)

$10,000 ÷ $20,000 = 50%

Portion of reduction of federal itemized deductions attributable to state income taxes

$4,500 × 50% = $2,250 State income tax added back

(amount of allowable federal itemized deductions attributable to state income taxes)

$10,000 - $2,250 = $7,750

Missouri itemized deductions

$25,500 - $7,750 = $17,750

(4) The proportional language in section 143.141, RSMo only applies while the Internal Revenue Code provides for a reduction in itemized deductions. Otherwise, all state income taxes must be added back.

Notes

12 CSR 10-2.160

AUTHORITY: section 143.961, RSMo 1986.* Original rule filed March 14, 1986, effective June 28, 1986. Rescinded and readopted: Filed June 2, 1993, effective Nov. 8, 1993.

AUTHORITY: section 143.961, RSMo 1986.* Original rule filed March 14, 1986, effective June 28, 1986. Rescinded and readopted: Filed June 2, 1993, effective Nov. 8, 1993.