As their retirement age approaches, many Georgians start to consider establishing legal residence in Florida, where no state income tax is levied on individuals. Although Georgia has not repealed the income tax on individuals, the Georgia General Assembly has taken steps in recent years to provide for the exclusion of higher and higher levels of retirement income, which eases the tax burden on retired individuals and, in turn, lessens the financial benefit of retiring to the Sunshine State.

Georgia taxable income — a definition.

Georgia taxable income for individuals is defined as an individual’s federal adjusted gross income minus certain deductions or exclusions. One such exclusion in Georgia is an individual’s “retirement income” up to certain defined levels. “Retirement income” for the Georgia retirement income exclusion includes the following: interest income; dividend income; net income from rental property;
capital gains income; income from royalties; income from pensions and annuities; and no more than $4,000 of an individual’s earned income.

Who is currently eligible for the retirement income exclusion?

A taxpayer is eligible for the exclusion if: (i) the taxpayer is 62 years of age or older during any part of the taxable year; or (ii) the taxpayer is permanently and totally disabled. Permanent and total disability is defined as a medically demonstrable disability that is permanent and that renders the taxpayer incapable of performing any gainful occupation within the taxpayer’s competence. A taxpayer does not have to be retired to be eligible for the retirement income exclusion. A taxpayer merely needs to live to be 62 years of age to qualify for the tax break.

Each taxpayer is entitled to the retirement income exclusion up to the limit in effect for that particular
tax year. In the case of a married couple filing jointly, each spouse, if otherwise qualified, is individually
entitled to exclude retirement income. This means that the total amount of exclusion may, if otherwise allowable, be up to twice the individual exclusion amount.

How much retirement income can a taxpayer exclude annually?

The answer depends on the taxpayer’s age and the tax year in question. For tax years beginning in calendar years 2010 and 2011, the maximum amount of retirement income that can qualify for the exclusion is $35,000 per taxpayer.

For tax years beginning on or after January 1, 2012, the answer is a little more involved. For tax years beginning on or after January 1, 2012, taxpayers who are 62, 63 or 64 years of age and taxpayers who are totally and permanently disabled will continue to have a maximum retirement income tax exclusion of $35,000.

Beginning January 1, 2012, taxpayers who are 65 years of age or older for any part of the tax year qualify for a higher retirement income exclusion limit. For tax years beginning in 2012, the exclusion
limit increases to $65,000 for individuals aged 65 or older. For years beginning in 2013, the maximum
exclusion amount rises to $100,000, while in 2014, the limit reaches $150,000. For tax years beginning in 2015, the maximum exclusion goes to $200,000 and finally, in 2016, the cap on the retirement income exclusion is removed altogether for taxpayers who have reached 65 years of age.

How are married couples affected?

In the case of a married couple filing jointly, each spouse is individually entitled to exclude retirement
income received by that spouse up to the exclusion limit, if otherwise qualified. Here is where some tax planning can produce additional tax savings. If a couple’s stock, interest-bearing accounts and rental income are all titled in either the husband’s or the wife’s name, the couple may miss out on a portion of what would otherwise be excludable retirement income. If certain retirement income, for example, is exclusively allocated to the husband, taxpayers may need to balance stocks or investment accounts in the name of the wife as best they can to offset the retirement amounts otherwise allocable exclusively to the husband. Income from property held jointly by
the husband and spouse will be allocated evenly.

What other changes to the Georgia Tax Code are we likely to see?

In other action taken during the 2010 legislative session, a Special Council on Tax Reform and Fairness for Georgians was established and charged with conducting a thorough study of the state’s current tax revenue structure and making a report on its findings to the Speaker of the House of Representatives and the Lieutenant Governor. On January 7, 2011, the Council submitted its report, which contained many recommendations regarding a restructuring of Georgia’s Revenue Code. One of its recommendations was the repeal of the retirement income exclusions described in this feature. Specifically, the Council recommended the repeal of the retirement income exclusion increases that are set to begin in 2012 and also the phase-out of the current $35,000 exclusion over a period of time.

Although the Council’s recommendations are a long way from becoming law and no action has yet been taken by the General Assembly that would repeal the retirement income exclusion, the matter should be monitored closely. Do not unpack your bathing suit and suntan lotion just yet!