Rhode Island Lawmakers Pass Flat-Tax System
Effective January 1, 2006

The lawmakers of Rhode Island passed a flat-tax system that is fairly straight forward and easy to calculate, with a single rate of 8% for 2006. The rate will eventually fall to 5.5% in 2011. The flat-tax system is retroactive to January 1, 2006, which means it applies this year. Due to the easy calculation, you will be able to compute your tax return using both the regular tax system and the flat-tax system, and then you can use the one that will save you the most money. You are also able to switch between the two systems, using the flat-tax system and the regular system another year.

When calculating your Rhode Island income tax using the regular tax system, you start by listing all your income. After that, you need to claim every deduction and exemption for which you are eligible in order to reduce that figure, because you do not want to be taxed on the entire amount.

Calculations using the flat-tax system are different. You take the same income figure you use for the regular tax system calculations and just multiply it by the flat-tax rate, which is presently 8%. That is all there is to it. The flat-tax system does not allow you to claim any deductions or exemptions allowed by the regular tax system. In addition, the flat-tax system only allows you to use five credits. They are as follows:

1. For tax you have paid to another state
2. For Rhode Island income tax withheld
3. For estimated tax you have paid
4. For the overpayment of tax from a prior period
5. For the tax a limited liability company (LLC) has paid to Rhode Island on behalf of a nonresident member

According to the new law, "no other state or federal credits shall be available to the taxpayer" under the flat-tax system. Due to this specific point of the new law, it is very important for you begin think about tax planning. The first thing you should look at is if most of your income comes from salary, bonuses or commissions (ordinary income). If it does, then you might be better off with the flat-tax system. Why? Well, the bulk of your income may be taxed at rates as high as 9% or 9.9% under the regular tax system, but only 8% (to be reduced next year) under the new flat-tax system.

Please feel free to call us with any questions concerning this new legislation, or if you would like to make an appointment to discuss tax planning.