By Paul Williams

Law360 (April 28, 2020, 8:44 PM EDT) -- Missouri senators took initial steps Tuesday to ensure that federal relief checks provided to residents in response to the novel coronavirus pandemic would not be subject to state income tax, adding to existing legislation an amendment establishing the exemption.

The amendment, tacked onto S.B. 704 by a voice vote, excludes stimulus payments authorized under the Coronavirus Aid, Relief and Economic Security Act from a Missouri resident's federal tax liability for state tax purposes. Because the payments were refundable tax credits and Missouri has a federal taxes-paid deduction, the relief checks could increase some residents' state tax liabilities, said Sen. Tony Luetkemeyer, R-Parkville, who offered the amendment.

"In this time of uncertainty and economic difficulty that people are facing, the government should not be taxing these stimulus checks," Luetkemeyer said. "Those were meant to go into the pockets of working families in Missouri, and it was not intended for us to be taxing those."

Although the amendment was added to the bill, the legislation would still need to be approved by the state Senate, the House of Representatives and the governor for the carveout to take effect. The underlying bill would have the state adopt the Multistate Tax Commission's model partnership audit statute that accounts for changes in federal partnership rules.

Under the federal relief law, the CARES Act, the Internal Revenue Service will send $1,200 to individuals and $2,400 to couples filing joint tax returns, plus $500 for each qualifying child. The payments will be reduced for those with incomes above $75,000, or $150,000 for couples, and they will be eliminated for those with incomes of more than $99,000, or $198,000 for couples.

Luetkemeyer said the state Department of Revenue had estimated that some residents could pay up to $56 in state income taxes on their federal stimulus payments.

Missouri is one of six states with a federal deductibility provision that could result in the relief payments being subject to state income tax, according to an April 8 report from the conservative-leaning Tax Foundation.

Janelle Cammenga, a policy analyst at the foundation, told Law360 that the amendment would benefit Missouri residents under a certain income level whose federal income tax liability would fall below the $5,000 threshold, or $10,000 for joint filers, because of the federal payments. The state caps its deduction for federal income taxes paid at those thresholds, and has phased out its federal taxes paid deduction for high-earners, she said.

"If you're within a certain income level, then you can receive a credit for up to $5,000 of the taxes that you paid to the federal government," Cammenga said. "So, with a credit like the CARES Act rebate, if that changes your federal liability to under $5,000, and you're within that income range, then your Missouri liability starts changing, and it starts increasing."

Cammenga said that the states with federal deductibility provisions can end up penalizing taxpayers for taking federal credits, and that Missouri may want to examine eliminating the provision altogether, especially since the deduction no longer applies to high earners.

According to the amendment, the deduction begins at 35% for those earning under $25,000 and phases out to a 5% deduction for income between $100,001 and $125,000. The deduction is eliminated for higher earners, according to the amendment.

Additionally, the amendment would allow Missourians who may have received a lower credit than they were owed – which could happen if they had a child or had their income change since last year – to list the missing portion of the credit on their 2020 tax return, Cammenga said.

Before the vote, Luetkemeyer told Law360 that he wanted to attach a provision ensuring that the federal payments wouldn't be taxed to existing legislation to help expedite its passage while lawmakers attempt to wrap up their session over the next two weeks. He said a similar amendment is slated to be offered Wednesday to a bill that he sponsors, S.B. 676, which is slated for a hearing before the House Ways and Means Committee.

No one objected to the amendment on the Senate floor, and a senator from across the aisle, Sen. Jill Schupp, D-St. Louis, thanked Luetkemeyer for bringing the tax provision forward.

"This is important to people, to make sure that this money stays in their pockets and that they are not taxed on money they need to get them through this," she said, referring to the economic downturn caused by the pandemic.

Cammenga said that of the six states with federal deductibility provisions, Iowa is the only other state that has also explored exempting the CARES Act rebates from state tax, although she noted that some others are not currently in legislative session.

--Additional reporting by Stephen Cooper and Philip Rosenstein. Editing by John Oudens.

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