Tax law changes need not faze filers

As the annual income tax filing deadline approaches, some taxpayers may be wondering how they will be affected by recent changes. As sponsors of the bills enacting many of these changes, we would like taxpayers to have accurate information.

The Utah Legislature has been working hard the past two years to reduce the tax burden while infusing record investments into public education and transportation infrastructure. Taxes have been reduced by nearly $400 million, including significant cuts and changes to the state individual income tax and the sales tax on food. Taxpayers will likely notice many of these changes when completing their state individual income tax returns for the tax years 2007 and 2008.

For tax year 2007, Utahns will choose to pay their individual income tax either under a "flat tax" option at the rate of 5.35 percent, with no deductions, or under the traditional multirate system with various deductions. Taxpayers calculate their taxes under both methods but only pay the lesser of the two amounts.

It's easy to understand that some taxpayers assume that the "flat tax" calculation for 2007 will be the same as the new non-optional "single-rate" system in place for tax years beginning in 2008. But this is not the case. The elective "flat tax" calculation for tax year 2007 is different than the new "single-rate" system.

The new "single-rate" system will tax income at a reduced rate of 5 percent and at the same time allow various tax credits to be subtracted from the amount of tax owed. Most filers will be able to claim one or more of the new non-refundable tax credits. These credits incorporate (a) itemized deductions such as charitable contributions and mortgage interest, or the standard deduction, (b) personal exemptions and (c) a retirement credit. At the same time, Utah will abandon the traditional multirate system.

Examining the single rate component of the new system without also considering the enacted tax credits provides a flawed view of actual tax amounts to be expected for tax year 2008.

Important considerations in enacting the recent income tax changes included providing a more stable and reliable source of education funding, reducing the tax burden for the people of Utah, and making Utah more competitive economically. The Legislature worked to balance these ideals and in the end adopted changes that made improvements in each area. Below is a brief summary of the expected outcomes:

1. The income tax, which is the primary source of revenue for public education, has been among Utah's more volatile taxes. The adopted changes reduce that volatility, allowing for better year-to-year budgeting for education.