Graphic illustration by Emily Metcalf
Graphic illustration by Emily Metcalf

BY LOWELL L. KALAPA – A funny thing happened on the way to doing state income taxes this year that may catch many taxpayers off-guard and could get some in trouble.

Neither the Internal Revenue Service nor the state department of taxation sent reminders that folks have to file their income taxes.  While the federal agency stopped sending income tax booklets years ago, the department halted the distribution of tax forms this year.  And both the federal agency and the state department sent no reminders in the form of a peel-off label to remind taxpayers that their income taxes will be due in a couple of weeks.

No doubt some of this change is to encourage taxpayers to file electronically over the Internet and to reduce the amount of paper the two agencies have to handle.  However, what administrators don’t realize is that making it difficult to file taxes for those taxpayers who are not computer savvy runs the risk that the tax return may never be filed.  Face it, there are many taxpayers who don’t even own a computer, let alone know how to get on the Internet or, for that matter, fear that they may strike the wrong key and file an erroneous return.

One of the basic public finance and tax principles is that a tax should be simple enough to understand and easy with which to comply.  For those taxpayers who have been filing a paper return for years, it is just not the same to get on a computer and try to figure out what you owe in income taxes.  While taxpayers can request paper returns by calling the department of taxation or the Internal Revenue Service, usually that takes a long wait on the phone.

Even a visit to the local office of the Internal Revenue Service can be daunting as the taxpayer has to pass through a security search that is even more stringent than going through TSA at the airport.  Credit should be given to the state tax department for putting the paper forms outside the building so one does not have to pass through security, an idea that the Internal Revenue Service should take as an alternative to having to put taxpayers through the stress of going through security at the Federal Building.

Another change that may catch taxpayers by surprise this year as they fill out their state income tax forms is the fact that if their federal adjusted gross income exceeds $100,000 for a single taxpayer or $200,000 for a couple, they will be prohibited from deducting their state income taxes that were withheld from their pay checks or that they paid in estimated taxes.  Further, if their income exceeded those thresholds, the amount of itemized deductions they can take is also capped at $25,000 and $50,000 respectively.

This change was adopted by the legislature last year as a way to generate additional revenue from those whom lawmakers believed were the “rich” people.  It was also argued that taxpayers don’t get to deduct their federal taxes on either the federal or state return so why should these higher income earners be allowed to deduct state income or general excise taxes.

However, what lawmakers learned this year is that as a result that change to the law didn’t hurt taxpayers, but the charities who depended on the high-income earners for major contributions, for who else can write a check for a major contribution like $50,000 to fund a capital campaign?  As a result, nonprofit organizations from across the state filed testimony in protest of the limit and asked that the itemized deductions remain unlimited no matter how large a taxpayer’s federal adjusted gross income.

But what will come as a surprise to administrators is the fact that because of this divergence from trying to mirror the federal laws, auditing taxpayer returns will become even more difficult as the state form has  schedules that indicate how a taxpayer arrived at the amount of deduction for federal versus state purposes.  This is because the taxpayer’s calculations are done on worksheets contained in the tax booklet and are never submitted as part of the return that is sent to the tax department.

As lawmakers attempt to raise additional revenue and make changes that create differences between the federal and state income tax laws, compliance and administration will become more difficult and more costly.  The whole idea of trying to conform to the federal law was to ease the annual chore of figuring what was income and what was not, what is taxable and what is not.  By creating more and more differences between the two laws, administrators, as well as taxpayers, will find more and more problems when doing their taxes.

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