Vermont Response to Bonus Depreciation

The federal Job Creating and Worker Assistance Act of 2002 was enacted March 9, 2002 with provisions which retroactively affect 2001 returns. Legislation that would disallow under state law the so-called bonus depreciation rules contained in new Internal Revenue Code 168 (k) has passed both chambers and has been signed by the Governor. This
provision is retroactive to January 1, 2001 and applies only to C Corps.

BNA, 7/2/02

Vermont Governor Signs Bill Ending State's 'Piggyback' Tax System
MONTPELIER, Vt.--Gov. Howard Dean (D) June 21 signed a tax bill (H.R. 753) that would end Vermont's piggyback income tax system, which calculates the state income tax liability as a percentage of federal liability.

The bill created a schedule of state individual income tax rates effective July 1.

Continuing to piggyback on the federal system would have required adjustments to the state percentage of federal liability in coming years as new federal rates kicked in, said George Phillips, tax policy analyst with the Vermont Department of Taxes. Most recently, Vermont's income tax was calculated as 24 percent of federal income tax liability, he said.

As well as decoupling the state tax from the federal tax, the bill allows taxpayers to exclude the first 40 percent of capital gains income before paying tax.

However, the bill specifically adopted the federal estate and retirement tax changes included in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (Pub. L. No. 107-16). The bill adopted the federal Internal Revenue Code as in effect on Jan. 1, 2002, and specifically includes the EGTRRA state death tax credit changes.
Five Tax Brackets Adopted

The bill laid out the rates at each of five tax brackets for the following categories of taxpayer: married individuals filing jointly and surviving spouses; heads of households; unmarried individuals other than surviving spouses or heads of households; married individuals filing separately and estates and trusts.

Married couples filing jointly, for example, would be taxed at these rates: for incomes of $46,700 and below, 3.6 percent;

for incomes between $46,700 and $112,850, $1,681 plus 7.2 percent of the taxable amount over $46,700;

for incomes between $112,850 and $171,950, $6,444 plus 8.5 percent of the taxable amount over $112,850;

for incomes between $171,950 and $307,050, $11,468 plus 9 percent of the taxable amount over $171,950;

for incomes above $307,050, $23,627 plus 9.5 percent of the amount of taxable income over $307,050.

Under the bill, the amount of taxable income established in the tables would be adjusted annually for inflation based on the Consumer Price Index using the same procedure used by the Internal Revenue Service.

The bill left the state income tax at 24 percent of federal liability for certain types of income sources, including: qualified retirement plans including individual retirement accounts and medical savings accounts; the recapture of the federal investment tax credit, and the tax on qualified lump-sum distributions of pension income.

The bill also entitled taxpayers to a credit against the state tax of 24 percent of the federal income tax credits for retirement income, investment tax, and child and dependent care.

S