NC Is Determined to Complicate Things

[JohnH]

Has anyone seen the new booklet that NC is sending to all employers? It has the new NC-4 withholding forms, along with a dozen pages of various explanations on how to fill in the NC-4. They tell us that new NC-4 forms are mandatory for all employees in NC. It also shows the new NC-4 EZ on the first page, with the note that MOST people will probably find it best to use that one.

It's amazing how bureaucrats can get themselves wrapped up in their own little world without any realization of how much they are complicating other peoples' lives. They have actually out-done the IRS with their 2-page W-4 form & instructions by a multiple of 6.

The last page says they printed these booklets at a cost of $49,619. I guess nobody considered that this will generated $249,619 of lost time as HR people, payroll departments, and tax preparers try to explain to employees how best to fill the darn thing out. (And that's only if we thow our hands in the air and tell them to just use the NC-4 EZ). Thanks, NCDR.

[FEDUKE404]

New NC-4 for withholding

Definitely agree!

The NCDOR seems intent to make things more complicated. I can only imagine the calls I will be receiving from clients who take a look at the newest NC-4 ( http://www.dornc.com/downloads/nc4.pdf ) and go into full panic mode.

To add insult to injury, the "new rules" only start in 2014 which means that both the clients and preparers will essentially be flying by the seat of their pants to make an accurate change. Of course Plan B would be to grind out some theoretical numbers. Neither is a pleasant thought!

FE

[mactoolsix]

Wow, I took a peek at this - I've done some tax returns that were simpler than that new form!

[JohnH]

They could have saved $40K by just sending out a withholding form on a single page with a note at the top which said:

"The State of NC wants more money.
We're getting it from you.
Deal with it!"

[Burke]

Curious. It says you can't claim allowances for exemptions, yourself, spouse, children etc. I recently read that NC was changing its tax code and in 2014 will start with FAGI and apply one rate, instead of FTI and then apply own rates and brackets. So is there to be no deduction for exemptions on the return? I also found the $20K limitation on mtge int & taxes interesting. So.....also, no other itemized deductions allowed except for charitable contributions?

[JohnH]

Here's a summary I found on one blog.

1) Flat 5.75% rate (fully phased-in)
2) Eliminates the personal exemption, retirement benefit, business pass-through income deduction, and all credits other than the Child Tax Credit. Notably, the plan does not restore the state’s Earned Income Tax Credit (EITC) set to expire after 2013.
3) Increases the standard deduction to $15,000 (MFJ),$12,000 (HOH), and $7,500 (Single/MFS)
4) Limits itemized deductions to mortgage interest plus property taxes capped at $20,000 (MFJ), $16,000 (HOH), and $10,000 (single) plus unlimited charitable contributions. Taxpayers take the higher of the standard deduction or itemized deductions.
5) Retains the child tax credit of $100 and increases it to $125 for taxpayers with AGI under $40,000 (MFJ) or $32,000 (HOH)

Looks like the personal exemptions are eliminated and dependent exemptions are replaced by a child tax credit (at the 5.75% rate, a child tax credit of $100 equals a dependent exemption of roughly $1,739; a $125 credit equals a dependent exemption of roughly $2,174)

I think in 2014 we will be back to the old way of having to prepare a separate itemized deductions schedule for the NC return -> no more piggy-backing on the Federal return and making a few tweaks here or there. (Just as aside, I don't have a problem with limiting the home mortgage interest deduction because I've never been a fan of subsidizing debt anyhow). But overall, this entire scheme is complicating the NC return way beyond what is reasonable.

Interesting change regarding exclusions for retirement benefits. The $2,000 exclusion for all retirees ($4,000 for Federal Govt and Military Retirees) is being eliminated. They can't eliminate the complete exclusion for vested NC retirees under the Bailey decision, but all other retirees are going to take a hit. That will probably be a huge revenue enhancer for the state, but over time I wonder if retirees will come to view NC as less "retiree-friendly. It probably won't matter much other than the perception, because losing this exclusion will only cost retirees $115 per person per year in additional taxes ($230 per person per year for Fed & Military retirees). Most save much more than that in property taxes alone when moving from high-tax states.

[FEDUKE404]

Trying to predict NC taxes with new rules

John,

As usual, you have stated the NC facts well.

Until I start preparing some NC returns with the relevant changes in place (which would be in early 2015), it is very difficult to see how significant an impact will occur with the "regular" NC filer.

Granted, there are those (high mortgage interest, large families, persons who took % of contributions as tax credit without itemizing, the EITC folks) who will probably see an increase in taxes.

As for the removal of the retirement benefits exclusions, that IS creating the most "conversation" (anger??) so far. However, in a worst case scenario, that could remove $8k of current deductions for a joint return. It is difficult for me to predict how that will interact with lower overall tax rates and the higher standard deductions.

If I were a betting person, I might make a small wager that when all is said and done (starting with the 2014 income tax returns) the average NC citizen might see a slight decrease in overall state income taxes. My second bet would be some folks will see a marginal increase. As for the hysteria from greatly higher taxes....I just do not see it!

My current problem is trying to answer the inevitable questions that will arrive within the next few months, without spending a lot of time and effort to run some projected numbers. Add to that the fact that most taxpayers see their tax situation only through the tunnel vision perspective of the size of their refunds. Get ready for a LOT of "but my refund LAST year was such and such more. . . ! !"

Now time to investigate more thoroughly whether I can take a business deduction for Tylenol and/or Jack Daniel.

FE

[erchess]

Parity

John noted that they cannot change the total exemptions for nc state and local government pensions covered by Bailey. Am I mistaken in my belief that they have to grand the same to Federal, Military and Other State pensions vested by the relevant date?

[JohnH]

Edwin, you raise a good point. I think the Bailey decision did also apply for vested Federal and Military retirees as well as vested NC employees who had 5 years of creditable service on Aug 12, 1989. So probably they will still get their exclusion. But I think everyone else who has been claiming the $2,000 exclusion and/or the $4,.000 exclusion is definitely out of luck.


Here's what Kiplinger said in one of their summaries:
North Carolina offers a break of at least $4,000 in exclusions for pensions from federal, state and local governments (depending on dates and length of service). It also offers an exemption of up to $2,000 for qualified private pensions, including IRAs. Out-of-state government pensions also qualify for the $4,000 exemption. But note: These two tax breaks have been eliminated starting in 2014.

(A tax break known as the “Bailey exemption” remains; this tax break exempts from taxation certain retirement benefits received by a state or federal government retiree, if the retiree had five or more years of creditable service as of August 12, 1989.)

[Burke]

A quick check of a return for a client I have which this will affect, shows that they may owe a little tax. MFJ, both 90 yrs old, with
$50K+ of medical expenses which I am assuming they can no longer deduct, still taking the retirement exclusion for one only due to Bailey, results in $662 taxable income. Heretofore, it was nothing. In fact, they really did not need to file, but insisted on doing so. I am assuming Social Security is still exempt? I wonder if they are sending this package out to pensioners. I hope not.

[FEDUKE404]

Bailey under new rules

John noted that they cannot change the total exemptions for nc state and local government pensions covered by Bailey. Am I mistaken in my belief that they have to grand the same to Federal, Military and Other State pensions vested by the relevant date?

Bailey is Bailey is Bailey. Nothing has changed for NC residents who currently have (or will have) retirement income covered by the Bailey ruling.

Useful Bailey link: http://www.dornc.com/taxes/individual/benefits.html

In fact, a very large % of my "Bailey folks" are retired military or US govt (civil service) retirees. If that is the only retirement income they receive (separate from Soc Sec benefits which the federal may tax but NC does not), the future taxation of retirement income will pretty much be unchanged. It should be noted that Bailey does NOT apply to exclusion of retirement income from another state, i.e. a person residing in NC who is receiving retirement from prior government employment with the State of NY cannot, now or in the future, claim a Bailey exclusion. (That person would lose the allowable $4k annual "govt retiree" exclusion under the new rules.)

As noted previously, the more relevant issue is related to the "number-crunching" involved when you add some things to the taxable side but at the same time raise the standard deduction and/or personal exemption. Toss in the "by the ways" of mortgage interest, large families, removal of education expenses (which has already occurred!), and then it becomes extremely difficult to predict the NC future. Perhaps the tax software providers will address such STATE projections (for estimated tax purpose etc) starting with the upcoming filing season, but my guess is they will not.

Time will tell.

FE

[JohnH]

Social Security will still be exempt, as I understand it.

I'm not at the office, but I'm pretty sure NC is requiring employers and pension plan payers to get a new NC-4 from everyone. But most pension plans send out the NC-4 annually anyhow, don't they?