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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 Internal Revenue Code (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 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:
Idaho income tax law now conforms to the IRC as amended and in effect on January 1, 2025. However, IRC section 85 related to unemployment compensation is applied as in effect on January 1, 2020.
West Virginia income tax law now provides that all amendments made to federal laws after December 31, 2023 but prior to January 1, 2025 apply to taxes imposed under West Virginia personal income tax laws. However, no IRC amendment made on or after January 1, 2025 may be considered.
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