by Cathy C. Miller, MBA, CFP®, CRPS®, CDFA™
You’d probably have to look long and hard to find someone who didn’t know that federal tax laws changed in 2018. But how many people realize that Georgia income tax laws have changed too? Following the sweeping changes to the federal tax code that occurred with the Tax Cuts and Jobs Act (TCJA) passed in December 2017, individual states scrambled to pass legislation to adjust their tax system at the state level. Georgia’s legislation was passed in March 2018, and, in many ways, mirrors the changes made at the federal level.
Before delving into the specific changes, it’s interesting to put our tax code into perspective vs. our neighboring states. Georgia is surrounded by states with low or no individual income tax burdens. Florida doesn’t levy an individual income tax, while Tennessee only taxes interest and dividend income at a rate of 3 percent. Prior to tax reform, the only neighboring state with a higher income tax rate than Georgia was South Carolina at 7 percent.
A state’s top income tax rate is generally associated with wealthy taxpayers, but in Georgia, the top rate kicks in at only $7,000 in income. That’s far below the state’s per capita income level of $42,159. This rate reduction, combined with the doubling of the standard deduction, will likely lower tax bills for most taxpayers in the state.
The reduction of the corporate income tax rate from 6 percent to 5.5 percent will also help the state compete for corporate investment. Florida, South Carolina and North Carolina all levy a lower rate than Georgia, and North Carolina, in particular, is stiff competition as it is recognized for its pro-growth tax code.
So, now that we understand the motivation and expected benefits behind the tax code reform, what exactly has changed, and what are the important differences?
The new Georgia tax rules:
- Reduced the top individual and corporate income tax rates;
- Doubled the standard deductions for individuals;
- Updated the Internal Revenue Code (IRC) conformity rules, with important exceptions;
- Adopted federal laws relating to net operating losses (NOLs); and
- Revised successor and assignment rules for certain Georgia income tax credits.
Let’s take a deeper dive into some specifics…
Tax Changes Impacting Individuals
The top tax rate for individuals is reduced to 5.75% (for taxpayers with Georgia taxable income over $7,000). This reduced rate only takes effect for tax years beginning January 1, 2019, and sunsets on December 31, 2025. It is also interesting to note that the legislation provides for a further reduction to 5.5% in 2020, but only if additional legislative action is taken.
In keeping with the spirt of the federal law, which doubled standard deductions, Georgia has also doubled its standard deduction through 2025, as follows:
- For single or head of household taxpayers, an increase from $2,300 to $4,600;
- For married taxpayers filing a separate return, an increase from $1,500 to $3,000; and
- For married taxpayers filing a joint return, an increase from $3,000 to $6,000.
Unlike the change to the tax rate, the change to the standard deduction takes place right away, starting with tax years beginning January 1, 2018. Like the individual rate change, however, this increased deduction will expire December 31, 2025.
Because taxpayers will have to elect the same method on their Georgia return as they use on their federal return (either itemizing deductions or using the standard deduction on both returns), analysis and proactive planning will be more important than ever before.
Tax Changes Impacting Businesses
Like the top individual rate, the corporate tax rate also falls to 5.75% for the 2019 – 2025 tax years. And just as with individual tax rates, for tax years beginning on or after January 1, 2020, the corporate tax rates will fall to 5.5%, if the legislature approves and the governor signs a joint resolution ratifying this additional rate reduction.
While the rate changes for individuals and corporations are temporary and sunset in 2025, other corporate tax law changes are permanent. For example, the Georgia IRC Section179 deduction limits now conform to the federal limits as follows:
- limited to $510,000 for qualifying property, with a $2,030,000 investment limit phase out in 2017;
- limited to $1 million, with a $2.5 million investment limit phase-out in 2018.
However, Georgia did not adopt the federal provisions for Section 179 deduction for certain “qualifying real property.”
For losses incurred in tax years ending on or after December 31, 2017, Georgia follows the new Federal Net Operating Loss (NOL) laws:
- No carryback of losses but unlimited carryforward, except:
- Two‐year carryback for farming losses; and
- Two‐year carryback and 20‐year carryforward for certain insurance company NOLs.
Net operating loss carryforwards incurred for tax years beginning on or after January 1, 2018, are limited to utilizing only 80% of the net operating loss (based on the Georgia tax loss). In other words, rather than being able to fully offset your Georgia taxable income with post-2017 net operating losses, you’ll still have to pay tax on 20% of your Georgia taxable income and carryforward that remaining post-2017 net operating loss. The limit does not apply to specified insurance companies.
Finally, Georgia adopted some additional rules creating more flexibility in assigning certain types of corporate income tax credits. Under the new law, credits that may be claimed by the originating entity against employer withholding taxes (e.g., Georgia jobs tax credits earned in certain counties) may now also be claimed against employer withholding taxes (or income taxes) by the assignee. These new provisions do not change the existing transferability rules for certain Georgia credits such as film tax credits, conservation easement credits, historic rehabilitation credits and post‐production film credits, as the prior rules all remain intact.
Federal Tax Changes Not Impacting Georgia
While Georgia changed quite a few laws to mirror the federal changes, it is important to understand which federal changes Georgia has NOT adopted before engaging in tax planning for future years. Some of the rules Georgia has not adopted include:
- 20% qualified pass-through deduction;
- 30% limitation on business interest expense;
- bonus depreciation rules;
- increased ($8,000) first-year depreciation limit for passenger automobiles if the passenger automobile is “qualified property”;
- 15-year straight-line cost recovery period for certain improvements to retail space;
- modified rules relating to the 15-year straight-line cost recovery for qualified restaurant property (allowing buildings to now be included); and
- 5-year depreciation life for most new farming machinery and equipment.
Many people are still trying to absorb the federal tax reform changes and how they may impact their personal tax situation. These changes to the Georgia tax code are the most sweeping we have seen in decades, and add an additional layer of complexity – and opportunity – to tax planning for 2018 and beyond. We encourage each of you to speak with your advisor and your tax preparer about what the changes on the state and federal level might mean for your unique situation.