United States

Wisconsin budget bill cuts individual income tax rates

INSIGHT ARTICLE  | 

Wisconsin’s biennial budget bill, Assembly Bill 68, was signed into law by Gov. Tony Evers on July 8, 2021. The bill, as it was presented to the governor, was so thoroughly amended by the legislature to become essentially a rewrite of his February executive budget proposed. Highlights of the final version, including a rate cut for middle-income earners and minor business tax changes, are described below.

Individual tax changes

For 2021, the budget provides a reduction in the individual income tax rate from 6.27% to 5.3% for filers in the third income tax bracket. Using the 2020 inflation-adjusted figures, the rate reduction applies to the following:  single filers earning between $23,930 to $263,480, married filers earning between $21,910, and $351,310, and married filing separately between $15,960 and $175,660.

For individuals who are eligible to claim a federal child and dependent care tax credit, there will be an additional credit available under Wisconsin’s tax laws. This credit does not go into effect until taxable years beginning after Dec. 31, 2021 and is subject to a few limitations. Previously, Wisconsin allowed expense deductions but did not include a child and dependent care tax credit.

Business tax changes

Income and franchise taxes

The budget bill increases the Wisconsin Research Credit’s ‘not-to-exceed’ limit on the amount of the unused credit that is refundable from 10% to 15%. The increase is effective for taxable years beginning after Dec. 31, 2020. Businesses with qualified research expenses, to the extent they cannot be used to offset tax, are now 50% more refundable than in 2020.

For tax years beginning after Dec. 31, 2020, partnerships, LLCs, and S-corporations are now eligible to elect to claim certain credits at the entity-level where they previously were only able to pass the credit on to their partners and shareholders. Among these include the Enterprise Zone Jobs Credit, Business Development Zone Credit and the Jobs Tax Credit. These credits must have been negotiated with the Wisconsin Economic Development Corporation before Dec. 22, 2017 and cannot be claimed by both the entity and the shareholders/partners in the same taxable year. An electing entity must make the election for each taxable year on its original return and cannot subsequently make or revoke the election.

Sales and use taxes

Effective Oct. 1, 2021, the definition of ‘candy’ is revised, broadening the exemption for some foods subject to sales and use tax. Generally, products that include a sweetener, natural or otherwise, and chocolate, fruit or nuts are considered taxable candy. The modified definition excludes foods that have predominantly dried or partially dried fruit. However, preparations with chocolate, nuts, yogurt or confectionary glazing on a fruit are still considered candy.

Takeaways

Wisconsin is just the latest state to provide an individual income tax rate reduction in 2021 legislative sessions, joining at least Arizona, Idaho, Iowa, Montana and Oklahoma. However, Wisconsin’s approximately 15% cut is one of the larger cuts seen this year.

Taxpayers were also closely watching the originally introduced budget proposal which would have effectively limited the manufacturing tax credit to $300,000. That provision did not make it in the final budget.

Another bill, Assembly Bill 191, vetoed entirely, would have eliminated Wisconsin’s Personal Property Tax beginning with assessments as of Jan. 1, 2022. Over 30 states impose a tax on some classes of tangible personal property.

Taxpayers with questions about the Wisconsin budget bill should reach out to their state and local tax adviser for more information.

RSM CONTRIBUTORS


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