There will be a change in the Rhode Island income tax rules effective in 2010 that could have an impact on you if you have capital gains. As reported in The Providence Journal, starting in 2010 capital gains will no longer receive preferential tax treatment in Rhode Island and will be treated as ordinary income. If you sell stocks, mutual fund shares, or other assets at a gain, you will be subject to state income tax in Rhode Island at the regular tax rate for your bracket, which ranges from 3.75% up to 9.9%. Prior to 2010, you could have paid tax on capital gains at an effective rate of 1.67% or as little as 0.83%, depending on your tax situation.
The change in the capital gains rate and the amount of your capital gains could affect whether you file using the regular tax rates or the flat tax rate on your Rhode Island tax return. The regular system generally allows you to claim various exemptions, deductions and credits, with tax on your net taxable income at the progressive rates up to 9.9%. Under the flat tax system, the rate is 6.0% for 2010, but you generally can’t claim the exemptions, deductions or credits.
If you have a high income, and especially if you have significant capital gains, it could be to your advantage to use the flat tax method, but only if that doesn’t mean paying a higher effective tax rate by not taking advantage of the tax breaks under the regular method. You should generally calculate your tax using both methods to determine which is more advantageous.
In the article in The Providence Journal, Rhode Island Tax Administrator David M. Sullivan is quoted as clarifying the tax treatment in Rhode Island if you sell your principal residence. Under federal tax rules, you would not owe any tax if your profit is less than $250,000 if you file as single, or less than $500,000 if you file jointly. That rule will still apply in Rhode Island and you would pay tax on the gain as ordinary income only if your profit is more than those thresholds.
As indicated by Ryan Forster for the Tax Foundation, there are more changes in store for 2011, after tax reform legislation signed by Rhode Island Governor Carcieri in June, 2010. Starting in 2011, the maximum tax rate will be reduced from 9.9% to 5.99%. The number of tax brackets will be reduced from five to three. The option to itemize deductions will be eliminated and the standard deduction will be increased to $7,500 for single or married filing separately, $15,000 for married filing jointly, and $11,250 for head of household. Personal exemptions are reduced from $3,650 to $3,500. The number of tax credits that can be claimed will be reduced, and the alternative flat tax option will be eliminated.
Neil Downing, “Change in R.I. law makes selling an investment more costly” – The Providence Journal
Ryan Forster, “Rhode Island Approves Tax Reform Package” -Tax Foundation