If you're 65 years old or older - congratulations.

You've probably paid your last state income tax.It's now clear that Utah retirees will be getting a state income tax break later this month. What remains unresolved is how old a retiree has to be to get the break and how much it will be.

At the very least, most 65-year-olds have paid their last state income taxes. In a Sept. 19 special legislative session, lawmakers and Gov. Norm Bangerter will decide which retirees get tax breaks and how much income will be exempt from taxation.

Bangerter said Thursday that he supports spending about $10 million on giving retired Utahns an income tax break.

House Speaker Nolan Karras, R-Roy, has a bill prepared for the session that allocates $8.7 million for retirees' income exemptions.

"We may change the formula (in Karras' bill) somewhat. If we lower the qualifying age so more are included, we'll lower the exemption level," Bangerter said.

Thus, if 62-year-olds or 59-year-olds are included, the level of income exempted from state taxation will drop significantly, since only $10 million will go for retiree tax relief, state officials say.

The retirement issue is one of the most complicated ever tackled by lawmakers. It's difficult to explain and understand.

The current law allows a retired couple over 65 both receiving pensions to earn $21,200 a year in pension income before the income is taxed.

Under Karras' plan, a retired couple over 65 both earning retirement income could earn $33,200 of any income - not just pension income - before it is taxed. In technical terms, Karras' plan doubles the current $6,000 individual retirement exemption and broadens the definition of exempt income to include all income, not just pension income. However, Karras would require that the extra $6,000 individual retirement exemption be offset by Social Security payments or other tax-free income. (See chart for comparisons.)

Income over $33,200 in Karras' plan is taxed on a phase-out basis. A couple over 65 could earn up to $85,500 before the phase-out expires, and they'd pay the regular state income tax rate of 7.35 percent on additional income.

Karras admits his plan is complicated. "We're trying to figure out a way to simplify it. Perhaps we do away with the phase-out, maybe we don't reduce the retirement exemption by Social Security payments. But those options cost (the state) more money," Karras said.

In suggesting a tax break for senior citizens several months ago, Bangerter said such a system could be a real drawing card for Utah. Seniors would want to retire in a state that sheltered their incomes so well.

Like Arizona or Florida, Utah could become a retirement haven, with all Utahns benefiting from the sales, property and utility taxes paid by the senior citizens and the industries that serve them.

The whole question of revamping retirement taxation is forced on legislators by the U.S. Supreme Court. A year ago the court ruled that states must tax state retirees' pensions the same as federal retirees' pensions. Utah is one of several states that doesn't tax its state and local government retirees' income but taxes federal government retirees like private-sector retirees. Thus, the high court ruled, something must change.

Utah could start taxing state retirees' pensions, could exempt federal retirees' pensions like state retirees' or could treat everyone the same.

"The feeling is, we treat everyone the same," said Karras. "But to exempt all income for all retirees would cost $50 million, and the Legislature won't spend that much. There is more emotion with this issue than even when we raised taxes. If you cut it off at 65, the 64-year-old retiree is mad at you. If you cut it off at $33,200, the more-well-to-do retiree is mad at you."

State retirees would cry foul if part of their pensions were taxed under Karras' plan - when none was before. So Karras suggests that all state retirees get an increase in their pensions to offset such a tax hike.

The offset would cost $3.7 million. Since the money given should be repaid to the state through taxing the state retirees' pensions, legislative attorney Kevin Howard says the $3.7 million is a wash. "We could, actually, never even give it to the state retirees, just send them a note saying we've given the State Tax Commission a credit in their name."

That probably won't sit well with retirees, however, who would want the cash so they could invest it for a year and at least earn interest.



Income taxation for a couple 65 years old

Current law Karras' proposal

$3,000 in personal exemptions $3,000 in personal exemptions

$1,200 in elderly exemptions $1,200 in elderly exemptions

$5,000 in standard deductions $5,000 in standard deductions

$12,000 in retirement exemptions $24,000 retirement exemptions*

$21,200 total exempt income $33,200 total exempt income*

*The extra $12,000 in exemption is reduced by Social Security payments or other non-taxed income.