Tennesseans have a special interest in the “Fiscal Cliff” scenarios at the end of the year.
States that have a state income tax can automatically deduct the tax from their federal income tax. The provision that allows people in states like Tennessee to deduct sales taxes has always been a temporary allowance that comes up periodically for renewal. The provision expires along with the expiration of the Bush Tax Cuts at the end of the year.
No one is sure what kind of legislation, tax cuts, or fiscal deals will be struck and there is a possibility the sales-tax deduction could get lost in the shuffle, since only about a half-dozen states are without an income tax. The last time it got put into the tax code, as a temporary extension, was when Tennessee’s U.S. Sen. Bill Frist was Majority Leader.
Tennessee is in the process of phasing out the state inheritance tax, but if the Bush Tax Cuts are not renewed, the state tax break will be offset by the reintroduction of the federal inheritance tax. Now the federal tax doesn’t kick in unless the estate is over $5 million, then it is taxed at 35 percent. If the reduction lapses, the limit drops to all estates over $1 million and the tax rate jumps to 55 percent.