What is Internal Revenue Code Conformity and Why Do You Care?


Pretty much every month in this newsletter, we mention that a state has updated its conformity to the Internal Revenue Code (IRC). What does this mean to you as a business or individual taxpayer?


State conformity to the (IRC) refers to the extent to which a state's tax code matches the federal tax code. Some states adopt the entire federal tax code, while others adopt only portions of it. Conformity can be set to occur either automatically or manually when the federal laws change.


There are two main types of state conformity:


Rolling conformity: States with rolling conformity automatically adopt changes to the IRC as they occur. This means that taxpayers in these states can generally rely on the fact that their state tax liability will be the same as their federal tax liability.


Static conformity: States with static conformity adopt the IRC as it existed on a specific date. This means that taxpayers in these states may need to keep track of changes to the IRC, as they may not be reflected in their state tax liability until the state legislature takes action to update its conformity statute.


The majority of states have rolling conformity, while a minority have static conformity. There are also a few states that have a hybrid approach, where they conform to some provisions of the IRC on a rolling basis, while others are static.


Why do states have different conformity rules?


The reasons for state conformity vary. Some states conform to the IRC in order to simplify their tax code and make it easier for taxpayers to comply. Others conform in order to ensure that their tax system is competitive with neighboring states. Still others conform in order to avoid double taxation, where taxpayers are taxed on the same income by both the federal government and the state government.


What does this mean for my tax situation?


State conformity can have a significant impact on taxpayers. For example, if a state conforms to the IRC and the federal government changes the tax rate on capital gains, the state tax rate on capital gains will also change. This can have a significant impact on taxpayers who invest in assets that generate capital gains.


It’s important to understand the state conformity rules in the states where you live and work. This will help ensure that you’re paying the correct amount of state tax.


This month, these states updated their IRC conformity:


Georgia has updated the provisions of all federal tax acts that were enacted on or before January 1, 2024. Provisions of the IRC which were enacted into law as of January 1, 2024 but had not yet taken effect will become effective for Georgia taxation on the same dates upon which they become effective for federal tax purposes.


Maine has adopted the IRC as of December 31, 2023 applicable for tax years beginning on or after January 1, 2023 and to any prior tax year as specifically provided by the IRC and its amendments as of December 31, 2023.


Oregon has advanced the state’s IRC conformity date to December 31, 2023 for transactions or activities occurring on or after January 1, 2024 in tax years beginning on or after January 1, 2024. 

State by State News

Alabama


Beginning in tax year 2024, pass-through entities may make or revoke their election to be taxed at the entity level up until the due date for filing the applicable income tax return, including any extensions. The previous deadline was the 15th day of the third month following the close of the tax year.


Also, beginning in tax year 2025, the election or revocation will be made on the entity’s tax return instead of a separate form.


Colorado


It’s been a busy month for the Colorado Department of Revenue, with new rules applying to:


Family and Medical Leave Insurance (FAMLI)

FAMLI benefits can be subtracted from federal taxable income for taxable years beginning on and after January 1, 2024.


State Income Tax Addback

For Colorado income tax purposes, each individual, estate, or trust must add any state income tax deducted in determining their federal taxable income. This rule also applies to any FAMLI premiums withheld from an individual’s wages and deducted by that individual as state income taxes in computing the individual’s federal taxable income.


Itemized Deduction Limitation: Itemized deductions are limited to the amount required to reduce the federal itemized amount of the federal standard deduction.


Partners: Each partner must add to federal taxable income their share of any state income tax deducted by the partnership for the tax year, regardless of the state to which the income tax was paid or accrued. The amount the partner must add is the partner's distributive share of the deduction claimed by the partnership, determined in accordance with the partner's distributive share, for federal income tax purposes, of partnership taxable income, or general loss.


S corporation shareholders: Each nonresident shareholder of an S corporation must add to federal taxable income their pro rata share of any Colorado income tax deducted by the S corporation for the tax year. Each resident shareholder of an S corporation must add to federal taxable income their pro rata share of any state income tax deducted by the S corporation for the tax year, regardless of the state to which the income tax was paid or accrued.


Itemized Deductions Addback

A taxpayer whose adjusted gross income is equal to or exceeds the Colorado itemized deduction cap, and whose itemized deductions exceed the statutory limits, is required to add back the difference between their claimed itemized deduction and the applicable limit on their Colorado income tax return to determine their Colorado taxable income.


For purposes of this rule and the itemized deduction cap, a taxpayer who files married filing separately or head of household on their federal income tax returns is considered a single filer.


A required addition for itemized deductions is reduced by: (1) any addback for state income taxes deducted by the individual as part of the itemized deductions on their federal return, but not for a share of state income tax deducted by a partnership or S corporation; and (2) any addback for a charitable contribution deduction for real property for a conservation purpose.


Georgia


Income Tax Rates

Effective July 1, 2024 but applicable to all taxable years on or after January 1, 2024, the corporate and individual income tax rates for tax year 2024 are reduced to 5.39%. Previously, the corporate tax rate was 5.75% and the individual tax rate was 5.49%.


Property Tax Reform

Governor Kemp has signed legislation that makes changes to the tax notice and appeal process and proposes a constitutional amendment for counties to provide a statewide homestead valuation exemption. The law provides for a special local option sales tax not to exceed 2% for counties and municipalities to provide for property tax relief.


Idaho


Effective January 1, 2024, both the corporate and personal income tax rates in Idaho have been reduced from 5.8% to 5.695%.


Michigan


The state’s flow-through entity tax (FTE) rate for 2024 is 4.25%. The 2023 FTE rate was 4.05%. This change should not affect members of calendar year flow-through entities. However, members of 2023-24 fiscal year electing flow-through entities that claim a credit on their 2024 Michigan individual income tax return may be underpaid and should evaluate whether estimated payments may need to be adjusted.


West Virginia


Effective January 1, 2024, all West Virginia personal income taxpayers will be able to reduce state taxable income by 35% of the amount of Social Security benefits received that are included in federal Adjusted Growth Income (AGI). This subtraction increases to 65% for taxable years beginning on or after January 1, 2025, and to 100% for taxable years beginning on or after January 1, 2026.


Previously, the subtraction for Social Security benefits was limited to married taxpayers filing jointly with federal AGI up to $100,000 and taxpayers who were single/married filing separately with federal AGI up to $50,000.

For more about State and Local Tax visit MizeCPAs.com