Missouri Subtractions from Income
Exempt Contributions Made to a Qualified 529 Plan
The state of Missouri allows a subtraction from federal adjusted gross income for the amount of annual contributions made to the Missouri Savings for Tuition Program (MOST), the 529 plan administered by the Missouri Higher Education Deposit Program, or any other qualified 529 plan. The maximum annual exempt contribution is $8,000 for single individuals or $16,000 for married couples filing a combined return. If you are a participant claiming a subtraction for a contribution made to the savings program, you must attach your statement provided by the program manager. The statement must be in the name of a plan participant (account owner) claiming the subtraction. This information may be asked of you by the Missouri Department of Revenue.
Interest on Exempt Federal Obligations
Interest from direct obligations of the U.S. Government, such as U.S. savings bonds, U.S. treasury bills, bonds, and notes is exempt from state taxation under the laws of the United States. Taxpayers who claim exclusion for interest from direct U.S. obligations must identify the specific securities owned, e.g., “U.S. savings bond”. A general description such as “interest on U.S. obligation” or “U.S. Government securities” is not acceptable. Failure to identify the specific security will result in the disallowance of the deduction. A federally taxed distribution received from a mutual fund investing exclusively in direct U.S. Government obligations is exempt. If the mutual fund invests in both exempt (direct) and non-exempt (indirect) federal obligations, the deduction allowed will be the distribution received from the mutual fund attributable to the interest on the direct U.S. Government obligations, as determined by the mutual fund. Attach a copy of the year-end statement received from the mutual fund showing either the amount of money received or the percentage of funds received from direct U.S. Government obligations, or a summary statement received from the mutual fund which clearly identifies the exempt and non-exempt portions of the U.S. Government obligation interest. Failure to attach the requested document will result in the disallowance of the deduction.
To arrive at the amount of related expenses, you may use actual expenses or a reasonable estimate. In general, you should use the same or similar method used to compute related expenses for federal income tax purposes, provided that the method reasonably reflects related expenses for Missouri-exempt income.
If you fail to compute reasonable related expenses, the Director of Revenue will make an adjustment based on the best information made available. If sufficient information is not made available or if your records do not provide sufficient information, the Director of Revenue will use the following formula to compute related expenses:
- Exempt income x Expense items = Reduction Total income to exempt income
The principal expense item in this formula is interest expense; however, the Director of Revenue may include other expense items because of their direct relationship to the production of exempt income. You may propose an alternative method provided that it properly reflects the amount of related expenses.
If you purchased an asset between July 1, 2002, and June 30, 2003, and you elected to use the 30% depreciation on your federal return, you may be able to subtract a portion of the depreciation. Enter the additional depreciation created by the Job Creation and Worker Assistance Act previously added back in prior years to the extent allowable by Section 143.121, (RSMo). This amount is computed by figuring the allowable depreciation prior to the Job Creation and Worker Assistance Act less the depreciation taken on your federal return. If you have previously taken an addition modification for a qualifying property, but have sold or disposed of the property during the taxable year, check the box on Line 12 and take a subtraction for the amount not previously recovered.
Partnership, Fiduciary, S Corporation, Railroad Retirement Benefits, and Other
Enter, as a positive number, the total negative adjustments (subtractions), reported from partnerships, fiduciaries, and S corporations. The partnership, fiduciary, and S corporation must notify you of the amount of any such adjustment (subtraction) to which you are entitled.
Railroad Retirement Benefits Administered by the Railroad Retirement Board, such as all Tier I and Tier II benefits and any railroad retirement sick pay, disability, and unemployment benefits, included in federal adjusted gross income (Form MO-1040, Line 1), are exempt from state taxation.
If you have other sources of negative adjustments, indicate the source on the line provided. Other sources of negative adjustments may be:
- Contributions into a Missouri Individual Medical Account (IMA) - Contributions that were made by your employer into an Individual Medical Account (IMA) and used to pay your health care expenses are exempt from Missouri income tax. The interest income earned on the IMA account is also exempt from Missouri income tax. The IMA contribution is identified in Box 14 of your Form W-2, Wage and Tax Statement. Reduce the amount of contributions by the amount of medical and dental expenses deducted on Federal Form 1040, Schedule A, Line 4, but paid for by the IMA and included in Missouri itemized deductions.
- Additional Capital Gain Deduction Due to Difference in Basis - If during the taxable year you realized a gain from the sale of property or other capital assets that had a higher tax basis for Missouri tax purposes than for federal tax purposes, you may exclude the gain or the difference in the basis of the property so disposed, whichever is smaller. If the gain was considered a long-term capital gain for federal income tax purposes, the exclusion is limited to the gain or 50% of the difference, whichever is smaller. No difference in basis can be claimed for any property obtained after December 31, 1972. If your basis for Missouri purposes is less than the basis for federal income tax purposes, no adjustment is required.
- Accumulation Distribution - If during the taxable year, you received a distribution as beneficiary of a trust that was made from accumulated earnings of prior years and you filed Federal Form 4970, the amount may be excluded from Missouri income to the extent that it was reported in your federal adjusted gross income.
- Capital Gain Exclusion on Sale of Low Income Housing - If during the taxable year, you sold a federally subsidized (HUD) low income housing project to a nonprofit or governmental organization, and at least 40% of the units are occupied by persons or families having incomes of 60% or less of the median income, you may exclude 25% of the capital gain from Missouri tax. However, the buyer of the property must agree to preserve or increase the low income occupancy of the project.
- Family Development Account - A family development account holder may subtract the amount of annual deposits made to the account (not to exceed $2,000). Approved withdrawals from the family development account are also exempt from state tax. Interest earned by a family development account is exempt from state taxation and may be subtracted from an account holder’s federal adjusted gross income. Note: Any money withdrawn for an unapproved use is subject to tax.
- Federally Taxable—Missouri Exempt Obligations - The amount of any bond issued by the Missouri Higher Education Loan Authority (MOHELA) including interest or proceeds resulting from the sale of the bond is exempt from Missouri tax. If the amount is included in federal adjusted gross income, the amount can be subtracted for Missouri tax purposes.
- Condemnation of Property - If you included in your Federal Adjusted Gross Income any gain arising from compulsory or involuntary conversion of property as a result of condemnation or the imminence thereof, you may exclude that gain from Missouri tax.
Military Income of Nonresident Military Personnel
Enter the amount of any military income received by nonresident military personnel stationed in Missouri. Nonresident active duty military servicemembers who are required to file a Missouri return may subtract the military income received from their federal adjusted gross income. Nonresident service members' spouses who are in Missouri due to military orders, and have declared another state as their state of residence may subtract their income from their federal adjusted gross income.
Build America Bonds and Recovery Zone Bonds Interest
Enter any interest received from Build America or Recovery Zone Bonds, which is included in your federal adjusted gross income. Attach a copy of your Form 1099-INT or any other applicable documentation.
Combat Pay Included in Federal Adjusted Gross Income Earned by Military Personnel with a MO Home of Record
The IRS allows enlisted members, warrant officers and commissioned warrant officers to exclude their military pay received while serving in a combat zone, or while hospitalized as a result of injuries incurred while serving in a combat zone. The exclusion of combat pay received by a commissioned officer (other than a commissioned warrant officer) is limited to the highest rate of enlisted pay. Subtract all military income received while serving in a combat zone, which is included in Federal Adjusted Gross Income (FAGI) and is not otherwise excluded. In most cases combat pay is not included in Box 1, Wages, of Form W-2 and therefore is not included in FAGI. However if Box 1 includes combat pay, the portion consisting of combat pay may be taken as a subtraction for Missouri purposes.
- EXAMPLE 1: A resident of Missouri, is an enlisted member of the military. He enters a combat zone in July and is there through December. He earns $12,000 January through June, and earns $20,000 July through December. Box 1 of his Form W-2 should only indicate the $12,000 he received prior to entering the combat zone. He is not entitled to a subtraction, as his combat pay is not included in his FAGI.
- EXAMPLE 2: A resident of Missouri, is a high-ranking commissioned officer. He enters a combat zone in July and is there through December. He earns $50,000 January through June, and earns $70,000 July through December. The IRS limits his exclusion to $40,000, causing Box 1 of his Form W-2 to indicate $80,000. He is entitled to a subtraction of $30,000, which represents the portion of Box 1 of Form W-2 attributable to combat pay that is included in his FAGI.
Net Operating Loss
Any amount of net operating loss taken against federal taxable income but disallowed for Missouri income tax purposes after June 18, 2002, (when choosing the five year option at the federal level) may be carried forward and taken against any income on the Missouri income tax return for a period of up to 20 years from the year of the initial loss. Attach Federal Form 1045, Schedule A and B, and/or the calculation of your net operating loss carryback/carryforward.
Missouri Public-Private Transportation Act
Enter any income received in connection with the Missouri Public-Private Transportation Act, which is included in your federal adjusted gross income.