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H.B. 158

             1     

INDIVIDUAL INCOME TAX - ADDITION OF

             2     
INTEREST TO FEDERAL TAXABLE INCOME

             3     
2001 GENERAL SESSION

             4     
STATE OF UTAH

             5     
Sponsor: Greg J. Curtis

             6      This act modifies the Revenue and Tax Code to provide that interest on certain indebtedness
             7      of other states is subject to individual state income taxation. This act makes technical
             8      changes.
             9      This act affects sections of Utah Code Annotated 1953 as follows:
             10      AMENDS:
             11          59-10-114, as last amended by Chapter 257, Laws of Utah 2000
             12      Be it enacted by the Legislature of the state of Utah:
             13          Section 1. Section 59-10-114 is amended to read:
             14           59-10-114. Additions to and subtractions from federal taxable income of an
             15      individual.
             16          (1) There shall be added to federal taxable income of a resident or nonresident individual:
             17          (a) the amount of any income tax imposed by this or any predecessor Utah individual
             18      income tax law and the amount of any income tax imposed by the laws of another state, the District
             19      of Columbia, or a possession of the United States, to the extent deducted from federal adjusted
             20      gross income, as defined by Section 62, Internal Revenue Code, in determining federal taxable
             21      income;
             22          (b) a lump sum distribution allowable as a deduction under Section 402(d)(3), Internal
             23      Revenue Code, to the extent deductible under Section 62(a)(8), Internal Revenue Code, in
             24      determining federal adjusted gross income;
             25          (c) 25% of the personal exemptions, as defined and calculated in the Internal Revenue
             26      Code;
             27          (d) a withdrawal from a medical care savings account and any penalty imposed in the


             28      taxable year if:
             29          (i) the taxpayer did not deduct or include the amounts on his federal tax return pursuant
             30      to Section 220, Internal Revenue Code; and
             31          (ii) the withdrawal is subject to Subsections 31A-32a-105 (1) and (2); [and]
             32          (e) the amount refunded to a participant under Title 53B, Chapter 8a, Higher Education
             33      Savings Incentive Program, in the year in which the amount is refunded[.]; and
             34          (f) for taxable years beginning on or after January 1, 2002, h FOR BONDS, NOTES, AND
             34a      OTHER EVIDENCES OF INDEBTEDNESS ACQUIRED ON OR AFTER JANUARY 1, 2002, THE h interest
             34b      from bonds, notes and
             35      other evidences of indebtedness issued h [ on or after January 1, 2002 ] h by:
             36          (i) a state other than this state;
             37          (ii) the District of Columbia;
             38          (iii) a possession of the United States;
             39          (iv) a political subdivision of a state other than this state; or
             40          (v) an agency or instrumentality of an entity described in Subsections (1)(f)(i) through (iv).
             41          (2) There shall be subtracted from federal taxable income of a resident or nonresident
             42      individual:
             43          (a) the interest or dividends on obligations or securities of the United States [and its
             44      possessions] or of any authority, commission, or instrumentality of the United States, to the extent
             45      includable in gross income for federal income tax purposes but exempt from state income taxes
             46      under the laws of the United States, but the amount subtracted under this Subsection (2)(a) shall
             47      be reduced by any interest on indebtedness incurred or continued to purchase or carry the
             48      obligations or securities described in this Subsection (2)(a), and by any expenses incurred in the
             49      production of interest or dividend income described in this Subsection (2)(a) to the extent that such
             50      expenses, including amortizable bond premiums, are deductible in determining federal taxable
             51      income;
             52          (b) 1/2 of the net amount of any income tax paid or payable to the United States after all
             53      allowable credits, as reported on the United States individual income tax return of the taxpayer for
             54      the same taxable year;
             55          (c) the amount of adoption expenses which, for purposes of this Subsection (2)(c), means
             56      any actual medical and hospital expenses of the mother of the adopted child which are incident to
             57      the child's birth and any welfare agency, child placement service, legal, and other fees or costs
             58      relating to the adoption;


             59          (d) amounts received by taxpayers under age 65 as retirement income which, for purposes
             60      of this section, means pensions and annuities, paid from an annuity contract purchased by an
             61      employer under a plan which meets the requirements of Section 404(a)(2), Internal Revenue Code,
             62      or purchased by an employee under a plan which meets the requirements of Section 408, Internal
             63      Revenue Code, or paid by the United States, a state, or political subdivision thereof, or the District
             64      of Columbia, to the employee involved or the surviving spouse;
             65          (e) for each taxpayer age 65 or over before the close of the taxable year, a $7,500 personal
             66      retirement exemption;
             67          (f) 75% of the amount of the personal exemption, as defined and calculated in the Internal
             68      Revenue Code, for each dependent child with a disability and adult with a disability who is
             69      claimed as a dependent on a taxpayer's return;
             70          (g) any amount included in federal taxable income that was received pursuant to any
             71      federal law enacted in 1988 to provide reparation payments, as damages for human suffering, to
             72      United States citizens and resident aliens of Japanese ancestry who were interned during World
             73      War II;
             74          (h) subject to the limitations of Subsection (3)(e), amounts a taxpayer pays during the
             75      taxable year for health care insurance, as defined in Title 31A, Chapter 1, General Provisions:
             76          (i) for:
             77          (A) the taxpayer;
             78          (B) the taxpayer's spouse; and
             79          (C) the taxpayer's dependents; and
             80          (ii) to the extent the taxpayer does not deduct the amounts under Section 125, 162, or 213,
             81      Internal Revenue Code, in determining federal taxable income for the taxable year;
             82          (i) (i) except as otherwise provided in this Subsection (2)(i), the amount of a contribution
             83      made [in] during the [tax] taxable year on behalf of the taxpayer to a medical care savings account
             84      and interest earned on a contribution to a medical care savings account established pursuant to
             85      Title 31A, Chapter 32a, Medical Care Savings Account Act, to the extent the contribution is
             86      accepted by the account administrator as provided in the Medical Care Savings Account Act, and
             87      if the taxpayer did not deduct or include amounts on [his] the taxpayer's federal individual income
             88      tax return pursuant to Section 220, Internal Revenue Code[. A]; and
             89          (ii) a contribution deductible under this subsection may not exceed either of the following:


             90          [(i)] (A) the maximum contribution allowed under the Medical Care Savings Account Act
             91      for the tax year multiplied by two for taxpayers who file a joint return, if neither spouse is covered
             92      by health care insurance as defined in Section 31A-1-301 or self-funded plan that covers the other
             93      spouse, and each spouse has a medical care savings account; or
             94          [(ii)] (B) the maximum contribution allowed under the Medical Care Savings Account Act
             95      for the tax year for taxpayers:
             96          [(A)] (I) who do not file a joint return; or
             97          [(B)] (II) who file a joint return, but do not qualify under Subsection (2)(i)(i); and
             98          (j) the amount included in federal taxable income that was derived from money paid by
             99      the taxpayer to the program fund under Title 53B, Chapter 8a, Higher Education Savings Incentive
             100      Program, not to exceed amounts determined under Subsection 53B-8a-106 (1)(d) and investment
             101      income earned on participation agreements under Subsection 53B-8a-106 (1) when used for higher
             102      education costs of the beneficiary;
             103          (k) for [tax] taxable years beginning on or after January 1, 2000, any amounts paid for
             104      premiums [on] for long-term care insurance [policies] as defined in Section 31A-22-1402 to the
             105      extent the amounts paid for long-term care insurance were not deducted under Section 213,
             106      Internal Revenue Code, in determining federal taxable income; and
             107          (l) for taxable years beginning on or after January 1, 2000, if the conditions of Subsection
             108      (4)(a) are met, the amount of income derived by a Ute tribal member:
             109          (i) during a time period that the Ute tribal member resides on homesteaded land
             110      diminished from the Uintah and Ouray Reservation; and
             111          (ii) from a source within the Uintah and Ouray Reservation.
             112          (3) (a) For purposes of Subsection (2)(d), the amount of retirement income subtracted for
             113      taxpayers under 65 shall be the lesser of the amount included in federal taxable income, or $4,800,
             114      except that:
             115          (i) for married taxpayers filing joint returns, for each $1 of adjusted gross income earned
             116      over $32,000, the amount of the retirement income exemption that may be subtracted shall be
             117      reduced by 50 cents;
             118          (ii) for married taxpayers filing separate returns, for each $1 of adjusted gross income
             119      earned over $16,000, the amount of the retirement income exemption that may be subtracted shall
             120      be reduced by 50 cents; and


             121          (iii) for individual taxpayers, for each $1 of adjusted gross income earned over $25,000,
             122      the amount of the retirement income exemption that may be subtracted shall be reduced by 50
             123      cents.
             124          (b) For purposes of Subsection (2)(e), the amount of the personal retirement exemption
             125      shall be further reduced according to the following schedule:
             126          (i) for married taxpayers filing joint returns, for each $1 of adjusted gross income earned
             127      over $32,000, the amount of the personal retirement exemption shall be reduced by 50 cents;
             128          (ii) for married taxpayers filing separate returns, for each $1 of adjusted gross income
             129      earned over $16,000, the amount of the personal retirement exemption shall be reduced by 50
             130      cents; and
             131          (iii) for individual taxpayers, for each $1 of adjusted gross income earned over $25,000,
             132      the amount of the personal retirement exemption shall be reduced by 50 cents.
             133          (c) For purposes of Subsections (3)(a) and (b), adjusted gross income shall be calculated
             134      by adding to federal adjusted gross income any interest income not otherwise included in federal
             135      adjusted gross income.
             136          (d) For purposes of determining ownership of items of retirement income common law
             137      doctrine will be applied in all cases even though some items may have originated from service or
             138      investments in a community property state. Amounts received by the spouse of a living retiree
             139      because of the retiree's having been employed in a community property state are not deductible as
             140      retirement income of such spouse.
             141          (e) For purposes of Subsection (2)(h), a subtraction for an amount paid for health care
             142      insurance as defined in Title 31A, Chapter 1, General Provisions, is not allowed:
             143          (i) for an amount that is reimbursed or funded in whole or in part by the federal
             144      government, the state, or an agency or instrumentality of the federal government or the state; and
             145          (ii) for a taxpayer who is eligible to participate in a health plan maintained and funded in
             146      whole or in part by the taxpayer's employer or the taxpayer's spouse's employer.
             147          (4) (a) A subtraction for an amount described in Subsection (2)(l) is allowed only if:
             148          (i) the taxpayer is a Ute tribal member; and
             149          (ii) the governor and the Ute tribe execute and maintain an agreement meeting the
             150      requirements of this Subsection (4).
             151          (b) The agreement described in Subsection (4)(a):


             152          (i) may not:
             153          (A) authorize the state to impose a tax in addition to a tax imposed under this chapter;
             154          (B) provide a subtraction under this section greater than or different from the subtraction
             155      described in Subsection (2)(l); or
             156          (C) affect the power of the state to establish rates of taxation; and
             157          (ii) shall:
             158          (A) provide for the implementation of the subtraction described in Subsection (2)(l);
             159          (B) be in writing;
             160          (C) be signed by:
             161          (I) the governor; and
             162          (II) the chair of the Business Committee of the Ute tribe;
             163          (D) be conditioned on obtaining any approval required by federal law; and
             164          (E) state the effective date of the agreement.
             165          (c) (i) The governor shall report to the commission by no later than February 1 of each year
             166      regarding whether or not an agreement meeting the requirements of this Subsection (4) is in effect.
             167          (ii) If an agreement meeting the requirements of this Subsection (4) is terminated, the
             168      subtraction permitted under Subsection (2)(l) is not allowed for taxable years beginning on or after
             169      the January 1 following the termination of the agreement.
             170          (d) For purposes of Subsection (2)(l) and in accordance with Title 63, Chapter 46a, Utah
             171      Administrative Rulemaking Act, the commission may make rules:
             172          (i) for determining whether income is derived from a source within the Uintah and Ouray
             173      Reservation; and
             174          (ii) that are substantially similar to how federal adjusted gross income derived from Utah
             175      sources is determined under Section 59-10-117 .





Legislative Review Note
    as of 2-1-01 10:51 AM


For purposes of the individual income tax, this legislation taxes interest from certain state and local
bonds, notes, or other debts ("interest on debts") that are issued out of state while not taxing
interest on debts issued in Utah. This differential taxation of interest on debts might be challenged
as discriminatory under the Commerce Clause of the Constitution of the United States
("Commerce Clause"). Legal arguments exist in favor of and against the constitutionality of this
legislation. However, a limited legal review of this issue has found that a distinct majority of
states tax interest on debts in a manner similar to this legislation, and that at least one court, the
Ohio Court of Appeals, has upheld a similar tax which was challenged under the Commerce
Clause.

Office of Legislative Research and General Counsel


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