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State and Local Taxes Newsletter

State and Local Tax Update – Fall 2016

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Indiana Back-to-School Credits and Deductions

It’s that time again — school is back in session! As students prepare to return to classrooms and universities across the state, don’t forget that Indiana offers several education related credits and deductions. Check out these ways to maximize the money you’re already spending on education.

Save for college — The CollegeChoice 529 Savings Plan can earn you a 20 percent credit (up to $1,000) for contributions made this year. To contribute to an education savings plan you do not need to be a family member. This is a great way for grandparents to contribute to grandkids’ college fund and also receive a break on their Indiana taxes.

Donate to higher education — Be sure to keep your receipt/letter from the institution and this donation may get you a state credit and deduction on your federal tax return. Making a contribution to support your Indiana college of choice could net you up to a $100 (if filed singly) or $200 (if filed jointly) credit when you file your state tax return. You’ll get a bigger bang for your buck if you itemize deductions on your federal tax return.

Contribute to K-12 scholarships — When you contribute to a qualified scholarship granting organization, the funds are used to provide scholarships for Hoosier children in grades K-12. A contribution can net a 50 percent credit against your state tax liability. While there are no limits on the size of qualifying contribution, the entire tax credit program has a limit of $7.5 million in credits per state fiscal year. This contribution also may qualify as an itemized deduction on your federal tax return.

Donate to K-12 education — You can get a tax refund check-off by donating some, or all, of your state refund to the Public K-12 Education Fund.

Qualify for an Education Expense Deduction — If you have a dependent child enrolled in K-12 private school or who is homeschooled, you may qualify for a deduction based on education expenditures for that child. Expenditures include tuition, fees, textbooks and school supplies. If you are eligible, this deduction is $1,000 per qualified dependent.

Qualify for the Public School Educator Expense Credit— Eligible educators working for an Indiana school corporation are entitled to a credit for qualified expenses paid for certain classroom supplies. This credit can be as much as $100 or $200 if you are married and both spouses meet the requirements.

In order to take advantage of these credits/deductions on your 2016 Indiana individual income tax return, be sure to make your contributions and payments by Dec. 31, 2016.

Indiana Elimination of Sales Factor “Throwback Rule” Effective For 2016 Tangible Product Sales

The elimination of the “Throwback Rule” applies to situations where a seller ships products from an Indiana location to a destination state where the seller is not subject to tax. Prior to January 1 2016, all sales not subject to taxation in a destination state were “thrown back” into the Indiana sales factor for apportionment purposes. The elimination of the throwback rule will benefit taxpayers in this situation by reducing the amount of sales required to be sourced to Indiana.

The Indiana Department of Revenue has also specified that the sale of computer software, regardless of the method of delivery, constitutes a sale of tangible personal property.

Tennessee Expected to Further Advance Sales and Use Tax Economic Nexus Rule

Sales tax collection requirements have historically been imposed by a state tax department when a company has a physical presence within its borders. State tax departments are getting aggressive and expanding their reach of merchants doing business in their state to those whom regularly solicit customer’s business.

In August 2016, the Tennessee Department of Revenue held a public hearing that would establish a sales and use tax economic nexus standard in the state.

Under this proposed rule, an out-of-state merchant who engages in the regular solicitation of customers in the state through any means, and whose Tennessee taxable sales exceed $500,000 during any calendar year, has sales tax nexus and must register with the Department for sales and use tax purposes by January 1, 2017.

Insights:

  • An out-of-state dealer who solicits sales in Tennessee through any means and expects to exceed the $500,000 taxable sales threshold should consider the impact that this rule may have on them for tax planning and reporting purposes.
  • Tennessee followed Alabama by using a regulation to implement a sales and use tax economic nexus standard. South Dakota and Vermont recently adopted economic nexus standards via legislation. In addition, economic nexus legislation has been introduced in several other states.
  • Even though there appears to be an economic nexus trend, there is hope for taxpayers. Litigation is underway challenging the Alabama and South Dakota economic nexus standards. This debate of regular solicitation creating sales tax nexus is NOT OVER.

Your team at Somerset CPAs and Advisors will continue to watch pending legislation and proactively keep you updated.  For more information on these and other State and Local Tax topics, get in touch with our SALT team at info@somersetcpas.com.