You may not be surprised to hear that a look deep inside Wisconsin tax law reveals a complex list of additions, subtractions, credits, and adjustments that rival those in the federal tax code. Amid all of this complexity, however, are some fairly common ways to save some money.
In order to prepare your Wisconsin income tax return you first need to prepare your federal income tax return. This is because Wisconsin starts with federal adjusted gross income (AGI). We will discuss some common additions required in Wisconsin and some common subtractions. The additions and subtractions yield your Wisconsin taxable income, which you use to calculate your tax. After calculating the tax you get a chance to chip away at it with some Wisconsin credits, so of course we will take a look at some of these as well, and finally we will discuss a couple of planning ideas.
The two most common add-backs are the addition of municipal interest, which is not taxable on your federal return, and the addition of some of the capital losses you may have deducted on your federal return.
The good news is that there are more common subtractions than additions. These include the following:
1. Interest from U.S. bonds.
2. The Wisconsin income tax refund from the prior year if you were required to include it on your federal return.
3. Federally taxable unemployment compensation.
4. If you had capital gains (gains from the sale of assets held for over one year) you may be able to subtract as much as 30 percent of those gains from your Wisconsin income.
5. Up to $6,943 (per student) of the amount you paid for tuition and mandatory fees for post- secondary education.
6. Amounts contributed to an Edvest or Tomorrow’s Scholar college savings account. You may also get a deduction for amounts rolled into these programs from those of a different sponsoring state.
7. Amounts paid for private school tuition. The maximum subtraction is $4,000 for an elementary student and $10,000 for a secondary student.
8. Finally, if you qualified for federal credit for child and dependent care expenses, you may get a similar subtraction on your Wisconsin return.
The “tuition and fees” subtraction is only available for “post-secondary” expenses paid to a Wisconsin or Minnesota school and gets phased out as income rises. Whether or not you qualify for the “child and dependent care expenses” deduction depends upon if you qualified for the federal credit. The federal credit may be available if you paid someone to care for your child age 12 or younger so that you could work. The “private school tuition” deduction is available regardless of income.
After all of this, you have arrived at “Wisconsin income.” Now you calculate your tax and check to see if you qualify for any tax credits to reduce it.
The three most common credits are the Wisconsin itemized deduction credit, the school property tax credit, and the married couple credit. The Wisconsin itemized deduction credit is typically generated by large charitable contributions, and the married couple credit is generated when both spouses have jobs.
The school property tax credit is included here with one other “planning idea.” If you pay rent or property taxes, you are eligible for a credit of up to $300. Many taxpayers get this $300 credit every year. But you have to have paid taxes during the calendar year to get it. If you sometimes pay two years’ worth of property taxes all at once to increase your federal itemized deduction, keep in mind that you are losing an easy $300 from Wisconsin.
One last thing which could save you or your children some cash. Many of our parents (or us) have U.S. Savings Bonds tucked away in a drawer or safe deposit box somewhere. In many cases, they get retrieved and cashed after someone passes away. U.S. interest isn’t taxed in Wisconsin, but it is taxed by the IRS. There is a federal election available in which you elect to pay the tax on this interest on the final return of the decedent. If they died early in the year, or have large medical expenses, or are just in a very low income tax bracket, you can make this election and the tax may be nothing. If you don’t make this election, the income is taxed on an estate tax return or to the beneficiaries.