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Individual income tax changes

Now that the dust has settled, here's a summary of the individual income tax changes that Gov. Huntsman and the Utah Legislature approved last week. An example of how the new tax system will work is also explained.

1. Utah’s previous top marginal rate of 7% (reduced to 6.98% for one year) will be replaced by a single rate of 5%. This will be the first time in recent memory, if ever, that Utah's individual income tax rate has been lower than the national average (currently 5.3%, non-weighted). However, a broader tax base will ensure that Utah's individual income tax burden as a percent of personal income will remain above the national average.

2. The new system will not have tax brackets.

3. Moderate progressivity will be maintained by offering non-refundable credits that are phased out as income increases.

4. Credits are phased out at a rate of 1.3 cents per dollar of adjusted gross income in excess of $24,000 for married households and $12,000 for singles. Since the credits are completely phased out at high income levels, Utah’s new system will be a 5% flat tax for high income households.

5. Taxpayers will be able to choose a non-refundable credit based on either 6% of the federal standard deduction (approximately $10,900 in TY2008) or 6% of federal itemized deductions (excluding Utah income taxes paid).

6. Taxpayers will be able to claim non-refundable credits for each household member equal to 4.5% of the federal personal exemption (or 6% of 75% of the federal personal exemption). The federal personal exemption will be about $3,500 in TY2008.

7. Existing credits such as historic preservation, renewable energy, and several others that appear on the TC-40S form and are reported on lines 20 and 30 of the TC-40 will not be impacted by these changes.

Here's an example of how the new system will work based on TY2008 assumptions.

  • adjusted gross income: $60,000
  • family size: 4
  • standard credit: $10,900 x 6% = $654
  • personal credits: $3,500 x 4.5% x 4 = $630

1. Total credit prior to phase out would be $654 + $630 = $1,284

2. The phase-out would be ($60,000 - $24,000) x 0.013 = $468

3. Total credit would be $1,284 - $468 = $816

4. Total tax would be 5% x $60,000 less $816 = $2,184.

Under the old system (prior to changes in last year's special session), this household would have paid $2,374 in taxes for tax year 2008. The new system reduces individual income taxes by $190 per year for this household.

In this example, we assumed that the taxpayer was using the standard exemption. If the household were itemizing, then the itemized amount less state income taxes paid would be multiplied by 6%.

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