| Sargent & Lundy Savings Investment Plan |
| PUTTING A CHILL ON TAX BREAKS |
The following excerpts are from an article in the Friday, February 27, 1998 "Wall Street Journal". The opinions expressed by the author, Lynn Asinof, may or may not reflect those of the SIP Committee. Some of the juiciest breaks in Uncle Sam's new tax law are running into roadblocks in several states. Federal tax changes are adopted automatically in some states, but specific legislative action is required in many others. As a result, new federal tax breaks - including the exemption on up to $500,000 of home-sale gains and the Roth IRA - may not be available for many people when figuring their state income taxes. "It's another layer of confusion," says Joe Donovan, leader of Coopers & Lybrand's multistate tax services practice in Boston. To date, only California and Oregon have taken action to adopt provisions in last year's sweeping changes in the U.S. tax code, according to the national Conference of State Legislatures. That means taxpayers in 17 states and the District of Columbia may be caught in a kind of legislative limbo when trying to figure out their state and local income taxes. The states are Alabama, Arizona, Arkansas, Georgia, Hawaii, Idaho, Indiana, Iowa, Kentucky, Maine, Massachusetts, Minnesota, New Jersey, North Carolina, South Carolina, Wisconsin and West Virginia. Most are expected eventually to conform to the new federal law, and several have legislation pending. Not a Sure Thing "But it isn't necessarily a slam dunk," says Carl F. Jenkins, director at Brown & Brown, a Boston certified public accounting firm. "States aren't necessarily keen on having their receipts decline just because the federal ones are." Even if states do adopt the changes, he says, they may not make them retroactive. that means people need to pay close attention to areas of their state tax code that no longer match up with Uncle Sam's. People who sold their homes after May 7, 1997, may find that out the hard way. As of that date, there is no federal tax on as much as $500,000 of gain from the sale of a principal residence for a married couple filing jointly. The exclusion is $250,000 for singles. But in states that haven't yet adopted the new federal code, the old state home-sale rules still govern. That means people who sell their homes for a profit may owe state tax unless they roll their profits into the purchase of a new house of equal or great value or can offset their gain by use of a one-time $125,000 exclusion available to people 55 years of older. Amending Returns Typically, that would mean forking over to the state about 4% to 10% of the gain, he says. The state might later adopt the new federal regulations retroactively, but taxpayers would have to file an amended return to get their money back. Because the old rollover provision gives people two years to buy a new house, people who aren't planning to buy another home may be tempted to delay paying their tax in anticipation of state action. That, however, could be a gamble, since they would then become liable for interest as well as taxes if their state decided not to embrace the new federal provision. The state tax issues get even more complicated when it comes to individual retirement accounts. Here, investors may find that several new investment vehicles touted as tax-free come with both big headaches and a big tax bite in their home state. Situation With the Roth The new Roth IRA, for example, is designed to let people below certain income levels put aside as much as $2,000 a year to grow tax-free. Contributions aren't tax deductible, but distributions are tax-free for those who are at least 59-1/2 years of age and have held their Roth for at least five years. At least, that's what the marketing says. In states where Roth IRAs don't show up in the tax code, there could be a variety of unpleasant tax consequences. The state "may end up treating it like any other income," taxing the Roth's annual earnings, says Gerri Madrid, fiscal policy associate with the National Conference of State Legislatures, Washington. In Massachusetts, for example, Roth IRA annual earning would be considered "unearned income," and could be taxed at a rate as high as 12%. That's more than double the state tax rate of 5.95% for withdrawals from traditional IRAs. Alternatively, a state could treat the Roth like a traditional IRA and tax the distributions. Or it might actually end up taxing both earnings in the Roth IRA and money taken out, "since they don't really know how to handle it," Ms. Madrid says. The same confusion surrounds the new federal "education IRAs," designed to help people pay for college by allowing them to invest up to $500 a year for each child under 18. State tax could take a bite out of earnings, distributions, or both, even though these accounts are free of all federal tax when funds are used to pay for qualified higher education. Ditto the new provision that allows spouses who don't work outside the home to set up deductible IRAs. Without specific mention in a state tax code, these accounts may be not only nondeductible, but taxed on earnings and distributions. Also affected may be the new liberalized federal rules that allow penalty-free withdrawals from IRAs, for buying a first home or for qualified education expenses. If there hasn't been any state legislation, state penalties may still apply. How long it will take for states to resolve these issues is unclear. The longer the delay, the greater the impact on withholding and estimated taxes. Some also worry that state action will come too late for people to take advantage of a one-time federal tax break. that break allows tax payments to be spread over four years on any funds withdrawn from traditional IRAs in 1998 as part of a conversion to a Roth IRA. But without passage of the necessary state legislation, these funds would be fully taxed by the state in the year of withdrawal. In Arkansas, residents will have to wait until next year to know how the state will handle the issue. that's because the legislature doesn't meet again until 1999. "They won't even consider it until next year," says Ms. Madrid. All this uncertainty means people may want to move cautiously. Some people may want to wait until the April 15 tax deadline nears to file their 1997 tax returns and perhaps even longer to take action on the IRA opportunities. |
This page updated on 3/2/98