INCOME TAX CHRONOLOGY

Effective Date	Individual Income Tax Rate (Percentage of Federal Income Tax)	Withholding Rate (Percentage of Federal Tax Withheld)
January 1, 1968	10%	10%
January 1, 1970	13%	12%
January 1, 1971	10%	10%
January 1, 1972	15%	10%
January 15, 1972	15%	15%
January 1, 1973	13%	15%
July 1, 1973	13%	13%
January 1, 1974	11%	11%
January 1, 1975	12%	10%
May 5, 1975	12%	11%
July 1, 1975	12%	13%
January 1, 1976	17%	15%
September 1, 1976	17%	17%
January 1, 1977	18%	17%
July 1, 1977	18%	18%
January 1, 1978	16%	16%
January 1, 1979	18%	18%
December 1, 1979	18%	None
January 1, 1980	15%	17%
January 1, 1981	15%	15%
January 1, 1982	18%	15%
July 1, 1982	18%	19%
January 1, 1983	20%	19%
July 1, 1983	20%	20%
January 1, 1984	19%	20%
July 1, 1984	19%	18%
January 1, 1985	20%	19%
January 1, 1986	19%	19%

Source: Nebraska Department of Revenue

In 1987, the Legislature passed LB 773 that decoupled Nebraska's income tax system from federal liability, and coupled it instead to federal adjusted gross income. This move, it was argued, "freed" Nebraska from the whims of the U.S. Congress, and created a system that was more stable without changing rates so often. Since 1987, Nebraska has increased the standard deduction (LB 1234, 1988) and increased the personal exemption, lowered the rate for two brackets, and provided for an elderly and childcare credit (LB 739, 1989). These tax cuts were intended to compensate for the increase provided in LB 773 (1987). In 1990, the rates were increased 8.75%, and in 1991 an additional 8.75% of the 1989 rate to provide for increased aid for schools as provided in LB 1059 (1990).

There were no substantial changes in 1991 or 1992, but in 1993 LB 240 replaced the personal exemption with a personal credit, changed brackets and rates, and phased out itemized deductions and the benefit of lower brackets. Under that law, taxpayers with adjusted gross incomes greater than the federal phase out amount (for 2004, $142,700) began to lose both itemized deductions and the standard deduction at a rate of $1 per $10 of adjusted gross income over the phase out amount. Federal disallowable itemized deductions were 80% phased out with the exception of charitable deductions, which were protected. The personal exemption credit also phased out at a rate of $5 for each $5,000 that federal adjusted gross income exceeds $119,000 for a joint return or $72,000 for a single return. These provisions were repealed by LB 968 (2006) effective for the 2006 tax year. LB 968 (2006) and LB 367 (2007) enacted, and then expanded an earned income tax credit and both bills widened brackets slightly to reduce income taxes.

Taxpayers with incomes over this threshold amount were also required to "add back" tax attributable to the fact that some of that individual's income tax was paid at the lower bracket rates by LB 240 (1993). These added tax provisions were not repealed by LB 968, however. While the amount of added tax is calculated by the Revenue Department and presented as a table in the tax booklet, it is essentially designed to recapture the difference between the tax actually paid and what the tax would have been if all taxable income had been taxed at the maximum rate of 6.84%. The added tax adds to tax liability for those with income over the federal threshold amount.

LB 401, enacted in 1997, lowered individual rates an average of 4.4% and increased the personal exemption by $10, both changes effective for tax years 1997 and 1998 only. LB 1028, passed in 1998, made these changes permanent. One half of the rate decrease originally enacted in LB 401 (1997) was lost for tax year 2003 with the enactment of LB 1085 in 2002. This 2.2% rate increase was made permanent by LB 759 (2003). Legislation passed in 2002 and 2003 forced taxpayers to add back "bonus depreciation" and larger capital expensing allowances that were allowed temporarily by Congress. The amount of depreciation added back may be taken over five years beginning in 2005. While Congress extended the "bonus depreciation" and capital expensing provisions several times, the add back in Nebraska law was halted for Nebraska tax purposes by LB 968 (2006).

Congress also increased the federal standard deduction for married individuals and Nebraska acted to neutralize this federal tax cut by enacting LB 596 (2003). This bill placed the 2003 federal standard deduction amounts in the Nebraska statute. This change was undone by LB 367 in 2007, so Nebraskans again may simply take the federal standard deduction.

B. Base - The individual income tax base is a relatively simple calculation for most taxpayers as follows:

Federal Adjusted Gross Income from Form 1040,

Plus: Non-Nebraska federally tax-free bond interest minus interest from federal obligations prohibited from state taxation,

Minus: Either standard deduction equal to the federal standard deduction or federal itemized deductions except state income taxes.

Equals: Nebraska taxable income.

There are other adjustments made for those with mutual fund income, which may be partially tax free, and for business losses and foreign taxes, but these are not applicable to most taxpayers.

Exemptions/deductions

The individual income tax base in Nebraska is reasonably broad. Generally, we follow the federal lead and fully utilize federal adjusted gross income in determining our tax. Nevertheless, the Tax Expenditure Report lists a few exemptions and deductions which, if eliminated, would increase the revenue derived from the tax.

The largest tax expenditures in the individual income tax are the allowance of itemized deductions ($235 million) and the standard deduction ($138.5 million.) The allowance of a net operating loss deduction costs $4.7 million. The federal law that prohibits state taxation of interest on federal obligations costs the state $11.5 million.

The special capital gains exclusion reduces revenue by $35 million in 2006. Under these provisions, a taxpayer may exclude 100% of the capital gain derived from the sale of stock of the taxpayer's employer that was obtained during his or her employment with the company or any extraordinary dividend received on such stock. To qualify for the exclusion, the stock may not be owned more than 90% by the members of any one family. The taxpayer may exclude the gains from the sale of stock of only one employer in a lifetime. The taxpayer selects the company by filing an election with the Department of Revenue. Successors of a decedent may also make the election after the death of the taxpayer. Clearly, the value of this special provision varies depending on the performance of the stock market.

Credits

Under NEB. REV. STAT. Sections 77-2715.07 and 77-2716.01, individuals are allowed credits against state income tax liability of:

1. A personal exemption credit of $106 for 2006 that is indexed to inflation. (cost - $159.5 million)

2. One hundred percent of the federally allowed elderly credit. To claim the elderly or disabled tax credit on the federal return, the taxpayer must be over 65, or retired on total disability. The base amount of the credit is $5,000 for an individual and $7,500 for married individuals filing jointly if both are qualified. This amount is reduced by Social Security or VA benefits, and one-half of AGI over $7,500 for single individuals, and $10,000 for married individuals filing jointly. The result is then multiplied by 15% to determine the credit. (cost - $30,000)

3. All or a portion of the federal child and dependent care tax credit. The federal child and dependent credit is available to those who have child or dependent care expenses that are necessary for employment. The dependent or dependents must be less than thirteen years old, or be incapable of caring for themselves while the taxpayer is providing over 50% of the dependent's support. The maximum expenses allowed are $3,000 for one qualifying dependent, and $6,000 for two or more. The credit is 35% of the expenses for taxpayers with AGI's of $15,000 or less, and declines 1% for every $2,000 of AGI to 20% of expenses for those with AGI's over $43,000.

Regarding the Nebraska credit, qualified resident individuals with federal adjusted gross income greater than $29,000 receive 25% of the federal credit. Qualified resident individuals with federal adjusted gross income of $22,000 or less receive a refundable credit equal to 100% of the federal credit, and for AGIs between $22,000 and $29,000, the perecentage of the federal credit is to be reduced 10% for each $1,000 of federal AGI greater than $22,000.

A refundable credit is a credit that allows the taxpayer to receive the credit even if he or she has no tax liability. In other words, if the taxpayer has AGI less than $22,000 and has no Nebraska income tax liability, he or she will still receive a check from the state equal to the federal credit. (cost - $11.7 million)

4. The earned income tax credit. Beginning with tax year 2007, Nebraska taxpayers receive a refundable earned income tax credit equal to 10% of any federal earned income tax credit received. The federal earned income tax credit is a refundable credit available to low-income, working taxpayers. The credit is calculated as a percentage of the earned income of the individual, up to a phase-out amount. Once the individual reaches the lower reaches of the middle class the credit is phased out. For 2006, $412 was the maximum credit for an individual with no children, $2,747 for an individual with one child, and $4,536 for an individual with two or more. The credit began phasing out once earned income exceeded $6,740 for an individual with no children and $14,810 for individuals with one or more children.

5. The Nebraska Advantage Research and Development Act allows a research tax credit to Nebraska business firms that qualify for the federal credit under Section 41. The amount of the credit is 15% of the federal credit. The credit may be taken five years. The credit expires for tax year 2011 and beyond. Qualifying businesses must take the first year of the credit by tax year 2010, but the permissible five years of credit life may extend beyong that year.

The tax credit to be taken either as a state sales tax refund or as a refundable income tax credit. The credit may not be used to refund any local sales taxes. Sales tax refunds must be filed quarterly. Credits may be distributed to partners, members, or other owners of pass-through entities.

6. The Nebraska Advantage Microenterprise Tax Credit Act allows up to $2 million of refundable individual income tax credits per year, beginning in 2006 through 2011 for applicants operating a microbusiness in depressed areas. The Department of Revenue is to allocate tentative tax credits to applicants on a first come, first served basis. Once the $2 million annual allotment of tentative tax credits are approved, no further applications may be approved. Any unused tentative credits may be carried over to the following year. There are to be no benefits for taxpayers receiving benefits under the Employment and Investment Growth Act, the Nebraska Advantage Rural Economic Development Act, or the Nebraska Advantage Act.

The credit is equal to 20% of the new investment or employment up to $10,000 per applicant throughout the life of the program. Tentative tax credits expire after one year. The total lifetime credits available to any one taxpayer or related entities are $10,000.

7. Economic development or beginning farmer credits. Economic development credits are complex and dependent on the addition of jobs and /or investment in the state. The oldest and richest of Nebraska's tax incentive program is the Employment and Investment Growth Act, quite often called by the bill number that enacted it, LB 775 (1987). These credits against the income tax cost $38.4 million in 2006. Also, an additional $40 million in credits were taken as refunds of sales taxes in 2006. LB 312 (2005) replaced the Employment and Investment Growth Act with the Nebraska Advantage Act, effective in 2006. The tax credits available are similar.

The Employment Expansion and Investment Incentive Act (renamed the Nebraska Advantage Rural Development Act) cost the state an additional $604,000 in used credits for 2006. The Quality Jobs Act and the Invest Nebraska Act have not had enough qualifiers to permit disclosure of the amount of credits earned. The beginning farmer credit is available to an owner of agricultural assets that rents or leases such assets to a qualified beginning farmer. The credit is equal to 10% of the cash rental income or 15% of the share rental income. There is also a refundable credit available to the beginning farmer equal to the entire cost of a financial management program, not to exceed $500. (NEB. REV. STAT. Section 77-5201 et. seq.) The Beginning Farmer Tax Credit Program cost the state treasury $83,000 in 2006. Further analysis and detail regarding Nebraska's tax incentive programs may be found at "Major Trends in Tax Policy - Economic Development Tax Incentives".

8. A credit for taxes paid in another state. (cost - $36 million)

C. Rate - In Nebraska, there are four tax brackets for the various types of taxpayers as shown below.

INDIVIDUAL INCOME TAX BRACKETS

There is one primary rate in Nebraska, 3.7%. (NEB. REV. STAT. Section 77-2701.01.) This rate is multiplied by bracket factors to generate a rate for each bracket (Section 77-2615.02). The bracket factors for years prior to 2003 were .6784, .9432, 1.3541, and 1.8054. Beginning with tax year 2003, the bracket factors are .6932, .9646, 1.3846, and 1.848 resulting in tax rates as follows:

INDIVIDUAL INCOME TAX RATES

D. Estates and trusts, partnerships, subchapter S corps. and LLCs - Estates and trusts must file a separate Nebraska tax return unless it is a Nebraska estate or trust, and all the beneficiaries are Nebraska residents, in which case the beneficiaries are to include the trust or estate income on their individual returns. Estates and trusts are taxed starting from a base of federal taxable income as modified by the adjustments allowed for the individual income tax. (NEB. REV. STAT. Section 77-2717.)

If it is a nonresident estate or trust, the tax is to be calculated on the entire income of the estate or trust as if it were a resident, and then the resulting tax liability is to be apportioned to Nebraska. This is done by multiplying the tax by a fraction that has the Nebraska source income in the numerator and the total federal income in the denominator.

With regard to partnerships, LLCs, and Subchapter S corps, resident owners are to include their share of the income on their returns. Non residents are to file a Nebraska return and submit an agreement to the entity promising to file Nebraska returns. If no agreement is filed, the entity is to withhold income tax on the non-resident's share of the income at the maximum individual income tax rate in Nebraska (currently 6.84%). Publicly-traded partnerships are exempt from the withholding requirement so long as the partnership agrees to file an informational return with the Department of Revenue for each partner with income derived in the that is in excess of $500. (Sec. 77-2727)

The non resident owners are to be liable for income tax only on that portion of the distributive share of the income that is attributable to Nebraska source income. (NEB. REV. STAT. Section 77-2727.) Similarly, any non-resident individual taxpayer is to pay tax only on income from sources attributable to Nebraska. (NEB. REV. STAT. Section 77-2733.) Residents, on the other hand, are liable for Nebraska income tax on all income, but receive a credit for any income tax paid to another state, limited to what the taxpayer would have paid on the income in Nebraska.

E. Administration and Disposition - Most income taxes are withheld from paychecks by employers and remitted to the state periodically. Annual returns then reconcile what has been paid against what is owed, and either a refund is sent by the state, or the balance sent by the taxpayer. The Revenue Department administers the individual income tax program, and all revenue flows to the General Fund.

F. Enforcement - Failure to file an income tax return may result in the Tax Commissioner seeking an order from the district court of the district where the individual resides or the principal place of business is located compelling the filing of a return. (NEB. REV. STAT. Section 77-27,109.) Failure to comply is enforced through the court's contempt powers. The taxpayer also has an affirmative duty to file an amended return whenever any change in the taxpayer's federal return on another state return materially affects a Nebraska return. (NEB. REV. STAT. Section 77-2775.) The Tax Commissioner has three years from the final date the return was to be filed (without extensions) to make a deficiency determination except that, in the case of the granting of an erroneous refund, the limit is two years.

A deficiency notice of income taxes is final 90 days after the deficiency notice is mailed to the taxpayer (150 days if the taxpayer is outside the U.S. and 30 days if the deficiency involves withholding) unless a written protest is filed with the Tax Commissioner first. (NEB. REV. STAT. Section 77-2777.) The grounds for the protest must be stated and taxpayer may request an oral hearing. The burden of proof for granting the protest is on the taxpayer except for allegations of fraud or the imposition of a penalty (NEB. REV. STAT. Section 77-2781). Appeal from an adverse decision on the protest must be filed within 90 days (30 days if it involves withholding). (NEB. REV. STAT. Section 77-2780.)

Interest is due at the rate determined by NEB. REV. STAT. Section 45-104.02 from the last date the incorrect return could have been filed. While taxpayers do not necessarily have to pay the tax to appeal a deficiency determination, the Tax Commissioner is allowed to proceed with collection procedures while the appeal is pending unless the taxpayer posts a bond with the court sufficient to cover the tax, and interest or penalties, and the costs of the appeal. (NEB. REV. STAT. Section 77-27,129.)

Similarly, a claim for a refund must be filed within three years of the due date of the return or two years from the time the tax was paid, whichever is later. (NEB. REV. STAT. Section 77-2793.) Any claim for refund must be filed in writing with the Tax Commissioner and state the specific grounds for the refund (Section 77-2795). The Tax Commissioner has six months to act on the claim and his or her decision is final 90 days after mailing notice of the decision to the taxpayer (Section 77-2796). Any claim for a refund must be filed with the Tax Commissioner first and denied (Section 77-2799). Any interest would be paid to the taxpayer at the same rate interest is owed on delinquent state taxes.

An appeal of any decision of the Tax Commissioner, on a claim for refund or a deficiency determination is to be filed in accordance with the Nebraska Administrative Procedures Act in the district court of Lancaster County or the district court for the county of residence of the taxpayer. The appeal is instituted by filing a petition in the district court within 30 days after the final decision by the Tax Commissioner. (NEB. REV. STAT. Section 84-917.)

The penalty for failure to file an income tax return is 5% of the tax due per month that the return is not filed up to a maximum of 25%. Negligent errors are subject to a penalty of 5% of the taxes due while fraud is subject to a 50% penalty. Willful evasion may result in an additional $1,000 penalty. (NEB. REV. STAT. Section 77-2790.)

The Tax Commissioner may waive any penalty but may not waive interest unless the taxpayer detrimentally relied on written erroneous advice from the Department or any related federal interest was abated.