Have you heard of the Tax Cuts and Jobs Act (“TCJA”)? Of course, you have. And, you’ve likely heard more about the TCJA than any other tax law before it. The last time the federal tax code was significantly transformed was in 1986, the year I was born, so the TCJA is a big deal. The question is, will states conform to the changes?
Despite significant media coverage of the TCJA, many forget this as a FEDERAL tax law. Unless we’ve decided to live in one of the seven (7) states with no personal income tax, we’re also subject to a state income tax. States typically utilize the federal tax law as a baseline, known as conformity, and then make state-specific modifications as they see fit. After all, if the federal government spent all this time issuing tax code and regulations defining the rules, why recreate the wheel if you agree with the basics?
There are three types of conformity:
Static (or fixed date) – The state chooses the Internal Revenue Code at a point in time. An example would be following the Internal Revenue Code of 1986. Nineteen (19) states currently use this approach.
Rolling – The state follows the Internal Revenue Code on a rolling basis incorporating changes automatically. Eighteen (18) states and the District of Columbia currently use this approach.
Selective – The state selectively chooses various pieces of the Internal Revenue Code. The choices range from entire Internal Revenue Code provisions to only specifically defined terms within the Internal Revenue Code. Examples include Pennsylvania & New Jersey.
It’s important to note that despite conformity, even on a rolling basis where changes are automatically incorporated, a state can choose to decouple from any federal provision, and often chooses to do so.
So, what does all this have to do with the TCJA? Depending upon the state, it may either follow some, all, or none of the TCJA. A list of state legislation enacted in response to the TCJA can be found here. If you prefer a deep dive into this specific topic, the Tax Foundation has a terrific piece on the issue that can be found here.
Every tax situation, from both a federal and state perspective, is unique and should be reviewed with your tax advisor. The TCJA and the associated state impact is a reminder of the need to communicate. The Tax Warriors® at Drucker & Scaccetti continue to follow all federal and state updates resulting from the TCJA. When you need answers, call on us.