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A tax cut in North Carolina, but first, new paperwork

By David Ranii and Virginia Bridges

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  • Five tips on the new forms
  • Forms, Q&A from N.C. Dept. of Revenue
  • Five tips on the new forms

    Tax experts and the state Department of Revenue helped us cut through what can look like complicated tax withholding forms. Their advice:

    1. Determine which form is right for you. The NC-4 EZ should work for taxpayers who don’t itemize deductions, and even for some who do.

    The NC-4 EZ includes three small tables for figuring out how many allowances you should claim based on your income, number of children under age 17 and your filing status – single, married filing separately, married filing jointly, qualifying widow(er) or head of household.

    Be aware that the state’s new income tax system eliminates personal exemptions, as well as a number of tax credits that were previously available – both of which boosted the number of allowances a taxpayer would claim. Tax experts say that the demise of personal exemptions is flummoxing some taxpayers when they fill out the forms.

    Consequently, most taxpayers should claim fewer withholding allowances than they did in the past.

    Some tax accountants are advising their individual clients that if they don’t want to owe anything when they file their state income tax, simply claim zero allowances.

    2. Those who expect significant itemized deductions may want to use form NC-4. It’s more complicated, but don’t panic. Most of it is a worksheet, not the form that has to be filled out. The most important part is knowing how much in itemized deductions (mortgage interest, property taxes and charitable contributions) you expect to have. Use last year’s tax return as a guide.

    3. Take that itemized deduction number and subtract your standard deduction. For example, if you’re married filing jointly, the standard deduction is $15,000. If you anticipate $20,000 in itemized deductions, the number you carry forward – think of it as your net itemized deductions – is $5,000.

    4. If you have significant dividends or interest income or significant federal adjustments (deductible IRAs, student loan interest deduction, moving expenses, etc.), you’ll need to make further adjustments to your net itemized deductions. If not, move on to the next step.

    5. Divide your net itemized deductions by $2,500. (Each allowance is worth $2,500.) If your net itemized deductions are $5,000, you and your spouse would claim a total of two allowances on your NC-4s. For example, you and your spouse could each claim one allowance; or you could claim zero allowances and your spouse could claim two.

    It’s a good idea, of course, to check with your accountant or the state Revenue Department if you have any questions.

    Staff writer David Ranii

  • Need help?

    Employees and employers who have questions about the revised NC-4 withholding form and the new NC-4 EZ can call the state Department of Revenue at 1-877-252-4487.

    Information, including answers to frequently asked questions, also can be found at

    The state also has posted a webinar about the forms.

    Through Wednesday, the state had received 2,431 calls about the forms. Those questions are being factored into the frequently-answered-questions section on the Revenue Department’s website, which will be updated regularly, said spokesman Trevor Johnson.

    Staff writer David Ranii

  • Skip the form?

    If employees don’t fill out either form, their employer is required to withhold state tax as if they are single and have no allowances.

    “That’s not necessarily a bad-case scenario,” said Tom Norton, a CPA with Raleigh accounting firm Rouse CPA.

    Norton reasons that the amount of withholding under this scenario is likely to be either the correct amount of withholding or more than required for most taxpayers. The latter “is better than the opposite,” he said.

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. It’s 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.

It’s 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. They’re perplexed by it all.

“I haven’t talked to anyone that’s been upset or stressed,” Harris said. “They just don’t know quite what to do.”

The withholding forms don’t 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, you’ve 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. That’s 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 law’s 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. “That’s what people need to focus on. That is what our goal has always been – to put more money in people’s 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 employer’s 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 don’t 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 hasn’t 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 aren’t 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.

“It’s very confusing,” she said. “I have tried to read through it three or four times, and I just can’t. My eyes glaze over after three or four paragraphs.” Staff writer John Frank contributed.

Ranii: 919-829-4877
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