Missouri Tax Cuts

On May 6, 2014, the Missouri House overrode Governor Nixon’s veto to enact a tax cut for Missourians – the first tax cut bill in 90 years for Missouri is estimated to provide $620 million in tax relief. The tax cuts will take effect gradually in five annual steps beginning in 2017.  The bill contains safeguards which require state income to increase each year by $150 million a year in comparison to the highest revenue amount in the previous three years.  If fully implemented, the top individual income tax rate in 2021 will be 5.5% and a 25% deduction will be allowed for business income reported on personal tax returns.  Detail of these provisions are as follows:

Rate Reduction

The top personal income tax rate will decrease from 6% to 5.5%, and the tax rate brackets will be increased for inflation.  Currently, the maximum 6% tax rate begins applying at $9,000 of Missouri taxable income. Beginning in 2017, the top individual income tax rate will be reduced by 0.1% and the tax brackets will be adjusted annually for inflation.  If the “income increase safeguards” are met, an annual rate reduction of 0.1% will apply until 2021 resulting in the top tax rates as follows:

If the “income increase safeguards” are all met, an individual with Missouri source income of $100,000 annually would have a total savings over the eight years (2014 to 2021) of a whopping $1,500 in Missouri tax (about $1,000 after netting the federal tax deduction for state income tax paid).

Business Deduction

The New Law provides for a  25% deduction for Missouri source business income reported on individual returns. Beginning in 2017, a deduction for Missouri source business income of 5% will be allowed.  Business income includes income from sole proprietorships, partnerships, LLCs and S Corporations.  If the “income increase safeguards” are met, a 5% annual increase of the deduction will apply until 2021 resulting in a Missouri source business income deduction of the following:

If the “income increase safeguards” are all met, an individual with Missouri source S corporation income of $100,000 would have a total savings over the eight years (2014 to 2021) of $4,200 in Missouri income tax (about $3,000 after netting the federal tax deduction for state income tax paid).

To better illustrate, take the following as an example – a married taxpayer owns a small business (sole proprietorship, partnership, LLC or S Corporation). The taxpayer has wages of $100,000 and business income taxable at the individual level of $300,000.  Charitable contributions are $6,000; mortgage interest is $20,000 and property taxes are $4,000 annually.

In our Summer 2012 newsletter, the same facts were used to illustrate the Kansas tax cuts. The results were much more impressive-a state tax decrease of 88% from $22,630 to $2,640.

Even though the Missouri tax cuts are a few years out, businesses operating in Missouri should factor in state taxes when considering business structure. Pass-through entities such as S Corporations and partnerships with Missouri source income will generally realize tax savings over C Corporations under the new Missouri law.  Since S Corporation and partnership income are passed through to the individual owners, the greatest benefits are received by those individuals living in Missouri or in a no-tax state.

Personal Exemption Amount

For low income taxpayers, a resident taxpayer of Missouri with adjusted gross income of less than $20,000 will have an increased personal exemption amount of $500. The current personal exemption is $2,100.  Thus, in 2017, those with less than $20,000 of income can claim a personal exemption of $2,600.  For example, an individual with Missouri taxable income of $15,000 would save about $30.

For more information, please contact Derrick Sims (derrick@meara.com).