Georgia Legislature Acts to Lessen Taxpayers’ State Tax Hit from Federal Law Change
Yes, it seems counterintuitive, but the huge federal tax cuts enacted in the Tax Cuts and Jobs Act (TCJA) were going to be a windfall for the State of Georgia. Why? Because Georgia “conforms” to the federal tax code, which means that Georgia residents mostly base their state taxable income on federal calculations. Thus, the elimination of federal deductions for individuals causes Georgia income to rise while the new federal corporation rules could result in an income tax cut for corporations in Georgia.
To lessen these effects, Governor Deal proposed and the Georgia legislature enacted HB 918, which updates the state’s conformity to the federal Code to reduce the amount of state taxes Georgia taxpayers will pay as a result of the federal changes.
‘Conformity’ with Federal Tax Laws
“Conformity” refers to the degree to which state tax codes conform to the federal tax code. Conformity uses federal taxable income as the starting point for state income tax calculation. Georgia conforms to the federal tax code with some omissions. Georgia has static conformity—it must pass a bill each year to adopt federal changes.
Lower Rates, Standard Deduction and Expensing
The Georgia bill was signed into law on March 2, 2018 and makes several key changes. First, it lowers the top tax income tax rate for both individuals and businesses. From January 1, 2019 through December 31, 2025, the top income tax rate for corporations and individuals is reduced from 6% to 5.75%. Another reduction is anticipated but must be approved by the Georgia legislature and Governor to reduce the individual rate further from 5.75% to 5.5%, effective January 1, 2020 and expiring December 31, 2025.
The individual standard deduction is doubled from $2,300 to $4,600 for single taxpayers and heads of household and from $3,000 to $6,000 for married taxpayers filing jointly. These increases are in effect from January 1, 2018 through December 31, 2025.
For depreciation and expensing, Georgia adopted the increased federal Sec. 179 expensing deduction of $1 million along with the $2.5 million purchase limitation. However, the expensing deduction for qualified improvement property was not adopted by the State. This special class of building improvements is allowed a 15-year recovery period under the federal TCJA.
Other Federal Rules
Georgia will follow the new rules for net operating losses that prevent carrybacks but allow unlimited carryforwards, but only to reduce 80% of taxable income. Georgia will not adopt the 20% passthrough deduction, the 30% business interest limitation, and the increased first-year depreciation limit for passenger automobiles.
Had the Georgia legislature and Governor Deal not acted, the State’s windfall from the federal legislation would have been $5.2 billion over five years. Under some estimates, Georgia taxpayers will still be paying more than under pre-TCJA law until fiscal 2021. Then, the state’s revenues will drop under the bill when the Georgia income tax rate moves down to 5.5%.