Missouri Code of State Regulations › Title 12 - DEPARTMENT OF REVENUE › Division 10 - Director of Revenue › Chapter 2 - Income Tax › Section 12 CSR 10-2.160 - State Income Tax Deduction Add-Back

Current through Register Vol. 49, No. 14, July 15, 2024
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.
PUBLISHER'S NOTE: The secretary of state has
				  determined that the publication of the entire text of the material which is
				  incorporated by reference as a portion of this rule would be unduly cumbersome
				  or expensive. Therefore, the material which is so incorporated is on file with
				  the agency who filed this rule, and with the Office of the Secretary of State.
				  Any interested person may view this material at either agency's headquarters or
				  the same will be made available at the Office of the Secretary of State at a
				  cost not to exceed actual cost of copy reproduction. The entire text of the
				  rule is printed here. This note refers only to the incorporated by reference
				  material.
(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 x
				  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 x 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 x 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 x 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