The most significant overhaul of North Carolina tax law in a generation takes effect in a few weeks, ushering in sweeping changes that include more take-home pay and a broader sales tax that includes movie and concert tickets.
But first comes the paperwork.
Most taxpayers are being asked to complete a new form this month, a direct consequence of the new income tax system. Its a complication some would say hassle for employees and employers alike that is drawing complaints even from some who cheered when GOP lawmakers pushed through a new tax bill and Gov. Pat McCrory signed it into law in July.
The new law lowers individual income tax rates to a flat 5.8 percent in 2014 and eliminates dozens of deductions from state returns. The change means employees must fill out a revised form the equivalent of the federal W-4 that will determine how much state income tax is withheld by their employer. Those who receive pensions and annuities must also complete the new forms.
George Ports, senior executive at CAI, a human resource management firm with offices in Raleigh and Greensboro, said employers have been calling and asking: Is this for real?
There are a number of (employers) that are being blindsided by this, Ports said.
Its up to employers to distribute the revised NC-4 withholding form and the new NC-4 EZ to workers and process them after employees have filled them out. Not to mention getting peppered with questions from workers.
The new tax form is just the first of many changes taxpayers will see in the year ahead as the state converts to a new system that Republican lawmakers say will promote economic growth. Critics warn, however, that the new system will hurt government programs and mostly benefit the rich.
Other major state changes effective Jan. 1 include:
• The elimination of popular tax deductions for retirement income, small businesses, unreimbursed job expenses and college 529 plans.
• The repeal of tax credits for child-care expenses, nonitemized charitable contributions and education expenses.
• A new sales tax on tickets to movies, college and professional sporting events, concerts, plays and museums.
• A new sales tax on newspapers, college meal plans and service contracts for tangible personal property, such as car repairs.
Getting deductions right
The confusion concerning the new state withholding forms is widespread.
David Harris, a Cary certified public accountant, said he has been flooded with calls from individual clients who have been notified by their employer that they need to fill out the forms. Theyre perplexed by it all.
I havent talked to anyone thats been upset or stressed, Harris said. They just dont know quite what to do.
The withholding forms dont affect the amount of state income tax paid. But the forms do dictate how much money the state withholds from each paycheck.
The goal is to have the proper amount deducted. If too much is withheld, youve essentially made an interest-free loan to the state, experts say. Too little, and you have to write a check when you file your income taxes.
Most of the people we talk to would rather receive a refund rather than owe tax when they file their return, said Lennie Collins, director of the income tax division at the Department of Revenue.
The new state withholding forms have no effect on the amount of federal tax withheld from paychecks. Thats governed by the federal W-4 forms.
Every employee in the state should have filled out a form NC-4 when they started their current job. For most employees, it was a one-and-done situation unless they discovered when they filed their income taxes that significantly too much, or not enough, state taxes were being withheld from their pay. If so, they adjusted their withholding as needed.
But the new tax law has rendered the old forms obsolete. The most startling change is that taxpayers can no longer claim personal exemptions for themselves, their spouse, their children or their dependents.
So if you were used to getting deductions for four people, now you have none, said Rollin Groseclose, an Asheville CPA who chaired the N.C. Association of Certified Public Accountants tax modernization task force.
The trade-off is that the standard deduction in 2014 will be significantly higher.
For married taxpayers filing a joint return, the standard deduction will be $15,000, up from $6,000 this year. For married filing separately and single taxpayers, the standard deduction will rise to $7,500, compared with $3,000 this year.
The current $100-per-child tax credit is also increasing to $125 for those who make less than $40,000 a year. Taxpayers making more than $100,000 will no longer receive the tax break.
Who will pay less?
What remains unclear is who will pay more and who will pay less.
A legislative analysis of the laws impact, prepared for Republican sponsors of the measure, found that a North Carolina household making roughly $40,000 would see income tax breaks ranging from $80 to $420. A married couple earning $20,000 with two children would roughly break even, while a single taxpayer making $250,000 would save $4,000.
However, other scenarios found that senior citizens on retirement income and small-business owners are likely to pay more in income taxes. The law eliminated a $50,000 income exemption for small-business owners.
Neither analysis took into account the cost of a new admissions tax on arts and sporting events and an increase in sales tax on some service contracts.
Sen. Bob Rucho, a Mecklenburg County Republican and a lead architect of the law, said the changes are needed to simplify the tax system, eliminate dozens of tax breaks for certain interests and lower the overall tax rate.
What it means to everybody starting in January 2014 is a larger take-home paycheck, he said. Thats what people need to focus on. That is what our goal has always been to put more money in peoples pockets.
Rucho said the withholding forms are a consequence of maintaining a system with deductions and credits, such as the deductions for mortgages and charitable contributions.
Every time you add in some additional deductions or you carve out special areas for special people it makes it a little more complicated, he said. The actual tax form will be simpler. This part is more complex.
An administrative burden
On Nov. 12, the state Revenue Department mailed out information packets to 239,000 employers across the state, as well as payers of annuities and pensions, notifying them that employees and pension recipients need to fill out the revised NC-4 or a new, simpler form, the NC-4 EZ.
The forms need to be completed in time for employers to withhold the correct amount for pay periods that begin on or after Jan. 1. So deadlines will vary depending on an employers payroll schedule and how much advance time it will need.
Gregg Thompson, director of the state chapter of the National Federation of Independent Business, a frequent Republican ally, labels it another administrative burden for small businesses that dont have human resource departments.
All of these additional requirements placed on small business owners takes more time from what they should be doing building and growing their businesses, he said.
Not everyone is complaining. The N.C. Chamber has alerted its 35,000 members about the changes and hasnt received any negative feedback, said Gary Salamido, a lobbyist for the group. The feedback we have received is, Thank you for letting us know, he said.
Salamido noted that businesses are used to dealing with new wrinkles in state tax law. Every year, there are tax changes, and there are new things people need to do, he said.
Kay Johnson, chief financial officer for Raleigh biotech firm ImmunoReagents, wishes the state had sent its information packets out much sooner.
A couple of months ago would have been nice, Johnson said. Some of my people arent real fast on filling out forms, and I am just going to have to practically stand over their shoulder with a blank form and make them fill it out while I am standing there.
Johnson said she remains befuddled after poring over the information provided by the state, including the tax forms themselves and related worksheets.
Its very confusing, she said. I have tried to read through it three or four times, and I just cant. My eyes glaze over after three or four paragraphs. Staff writer John Frank contributed.