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Individual Income Tax Bill (House Bill 1399)

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House Bill 1399, passed by the 2001 North Dakota Legislature, overhauled the short form method of filing for individuals on Form 37-S.

Under the new method, most individuals will simply take their federal taxable income and multiply it by the applicable tax rates. Tax tables will be provided so that most taxpayer will not have to do any tax calculations.

The new tax rates—2.1%, 3.92%, 4.34%, 5.04%, and 5.54%—correspond to five income brackets. The income ranges for each bracket vary depending on the taxpayer’s filing status (single, married filing jointly, head of household, qualifying widow or widower, and married filing separately). For tax years after 2001, the income brackets will be indexed for inflation.

The legislation also provides for a 3-year income averaging method to eligible farmers. This income averaging provision is similar to the one currently available under federal income tax law.

Individuals having a net long-term capital gain may subtract 30% of that gain from their federal taxable income before applying the tax rates. The following items are also subtracted from federal taxable income before applying the tax rates:

l    Interest from U.S. obligations,

l    other income exempted from state income tax by federal law, and

l     income from a partnership or other pass-through entity subject to the North Dakota’s financial institution tax.

Federal taxable income must be increased by a loss from a partnership or other pass-through entity subject to the North Dakota’s financial institution tax, and by the amount of a lump-sum distribution from a qualified retirement plan for which the 10-year income averaging rules were used for federal income tax purposes.

A credit equal to 14% of any unused federal credit for prior year minimum tax is also allowed, provided the individual previously paid North Dakota income tax on the federal alternative minimum tax on which the unused federal credit is based.

You might want to print out the worksheet - (20kb pdf) and flowchart - (30kb pdf) to see how the new tax calculation will affect your tax responsibility.