FISCAL NOTE
Date Requested: February 02, 2024
Time Requested: 08:33 AM |
| Agency: |
Tax & Revenue Department, WV State |
|---|
| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 1745 |
Introduced |
HB4852 |
|
|---|
| CBD Subject: |
Public Safety; Taxation |
|---|
|
FUND(S):
General Revenue Fund
Sources of Revenue:
General Fund
Legislation creates:
Decreases Existing Revenue, Increases Existing Expenses
Fiscal Note Summary
Effect this measure will have on costs and revenues of state government.
The stated purpose of this bill is to alleviate double taxation on foreign income at the state level. The bill sunsets the credit for income tax paid on foreign income in 2070.
Based on our interpretation, the bill would expand the Personal Income Tax credit for income tax paid to another state to include income tax paid to a foreign country. There is a similar tax credit allowed at the federal level. IRS data indicate that in Tax Year 2020 more than 22,000 West Virginia taxpayers claimed the federal credit at a total cost of roughly $5.8 million to the U.S. Treasury. The West Virginia credit may not exceed the percentage of Personal Income Tax otherwise due determined by dividing the portion of the taxpayer’s foreign-source income subject to taxation by the total amount of the taxpayer’s West Virginia income. In addition, the credit is only allowed when the taxpayer demonstrates to the satisfaction of the Tax Commissioner that, after application of the provisions of the Internal Revenue Code with regard to taxation of foreign income, double taxation of the foreign income included in the federal adjusted gross income of the taxpayer will occur unless the foreign income tax credit as provided herein is allowed. The credit for income tax imposed by a foreign country would be effective upon passage of the bill and would sunset on July 1, 2070.
The allowable foreign tax credit for any particular year may be less than the amount of eligible foreign income related taxes payable due to the foreign country imposing a higher tax rate than rates imposed in the United States on such income. The federal government allows excess foreign tax credits to be carried back for one year and carried forward for up to ten years. Taxes imposed by sanctioned countries as listed by the U.S. State Department are not eligible for the foreign tax credit. Taxpayers with foreign tax credits reportable on a 1099 type form from passive income do not need to file the Federal Form 1116 if the total amount of creditable foreign taxes are not more than $300 ($600 if married filing a joint return). The overall average claim on federal tax returns filed by West Virginia residents is roughly $290. Foreign tax credits tend to be more significant in those states bordering Canada or Mexico. Most West Virginia Taxpayers with a foreign tax credit receive full credit for foreign taxes paid and would not be eligible for an additional state tax credit. Based on available information, roughly 20% of affected Taxpayers, who file Federal Form 1116, with a federal foreign tax credit claim could be eligible for an additional state tax credit, but only if their federal credit claimed is less than the amount of eligible foreign taxes payable.
Based on limited available data and our knowledge concerning the complex nature of the federal foreign tax credit calculations, passage of this bill would be expected to decrease General Revenue Fund collections by an average of up to $1.1 million per year with significant potential variance from year to year.
Additional costs incurred by the State Tax Department would be $5,000 in FY2025.
Fiscal Note Detail
| Effect of Proposal |
Fiscal Year |
2024
Increase/Decrease
(use"-") |
2025
Increase/Decrease
(use"-") |
Fiscal Year
(Upon Full
Implementation) |
| 1. Estmated Total Cost |
0 |
5,000 |
0 |
| Personal Services |
0 |
0 |
0 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
0 |
5,000 |
0 |
| 2. Estimated Total Revenues |
0 |
0 |
-1,100,000 |
Explanation of above estimates (including long-range effect):
Based on our interpretation, the bill would expand the Personal Income Tax credit for income tax paid to another state to include income tax paid to a foreign country. There is a similar tax credit allowed at the federal level. IRS data indicate that in Tax Year 2020 more than 22,000 West Virginia taxpayers claimed the federal credit at a total cost of roughly $5.8 million to the U.S. Treasury. The West Virginia credit may not exceed the percentage of Personal Income Tax otherwise due determined by dividing the portion of the taxpayer’s foreign-source income subject to taxation by the total amount of the taxpayer’s West Virginia income. In addition, the credit is only allowed when the taxpayer demonstrates to the satisfaction of the Tax Commissioner that, after application of the provisions of the Internal Revenue Code with regard to taxation of foreign income, double taxation of the foreign income included in the federal adjusted gross income of the taxpayer will occur unless the foreign income tax credit as provided herein is allowed. The credit for income tax imposed by a foreign country would be effective upon passage of the bill and would sunset on July 1, 2070.
The allowable foreign tax credit for any particular year may be less than the amount of eligible foreign income related taxes payable due to the foreign country imposing a higher tax rate than rates imposed in the United States on such income. The federal government allows excess foreign tax credits to be carried back for one year and carried forward for up to ten years. Taxes imposed by sanctioned countries as listed by the U.S. State Department are not eligible for the foreign tax credit. Taxpayers with foreign tax credits reportable on a 1099 type form from passive income do not need to file the Federal Form 1116 if the total amount of creditable foreign taxes are not more than $300 ($600 if married filing a joint return). The overall average claim on federal tax returns filed by West Virginia residents is roughly $290. Foreign tax credits tend to be more significant in those states bordering Canada or Mexico. Most West Virginia Taxpayers with a foreign tax credit receive full credit for foreign taxes paid and would not be eligible for an additional state tax credit. Based on available information, roughly 20% of affected Taxpayers, who file Federal Form 1116, with a federal foreign tax credit claim could be eligible for an additional state tax credit, but only if their federal credit claimed is less than the amount of eligible foreign taxes payable.
Based on limited available data and our knowledge concerning the complex nature of the federal foreign tax credit calculations, passage of this bill would be expected to decrease General Revenue Fund collections by an average of up to $1.1 million per year with significant potential variance from year to year.
Additional costs incurred by the State Tax Department would be $5,000 in FY2025.
Memorandum
The stated purpose of this bill is to alleviate double taxation on foreign income at the state level. The bill sunsets the credit for income tax paid on foreign income in 2070.
The bill may require the Tax Department to enlarge its requirements for background documentation as well as tax schedules and forms.
In this bill, subsection (a), the credit for taxes imposed by another state or the District of Columbia is extended to taxes imposed by a “foreign country”.
A new subdivision (3) is added to the limitations set forth in subsection (b) so that the credit for foreign income is only allowed if the taxpayer can demonstrate that after application of the relevant provisions of the IRC, there will be double taxation unless this credit is allowed.
A new subsection (e) provides a sunset provision so that the credit for taxes otherwise due under this article is available from the regular session of 2024 through July 1, 2070. Making the credit effective “from amendment and reenactment of this section during the 2024 regular session through July 1, 2070” will be problematic because the personal income tax against which the credit may be claimed is based on a calendar year, and the first and last years of the credit will be partial years.
West Virginia has entered into Memorandums of Understanding with other state taxing jurisdictions to carry out the provisions of the W.Va. Code §11-21-20. It is not possible for the Tax Department to enter into MOUs with every foreign jurisdiction to which a West Virginia resident might travel and earn income, or claim a foreign tax credit, so the burden of proving entitlement would have to be on the taxpayer by a significant level of proof. If the taxpayer were entitled to claim credit for taxes paid to a foreign country, providing proof of taxes paid to a foreign jurisdiction could be challenging and would increase the required documentation for asserting the credit.
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov