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.
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. Neither the federal agency nor the state department sent reminders in the form of a peel-off label to remind taxpayers their income taxes will be due in a couple of weeks.
No doubt, some of this change is to encourage taxpayers to file electronically and 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 taxpayers who are not computer savvy runs the risk that the tax return may never be filed. Many taxpayers don’t even own a computer, let alone know how to get on the Internet. Others may fear striking the wrong key and filing an erroneous return.
One of the basic public finance and tax principles is that a tax should be easy to comply with and simple enough to understand. For taxpayers who have been filing paper returns for years, getting on a computer and figuring out what is owed in income taxes just isn’t the same. While taxpayers can request paper returns by calling the department of taxation or the IRS, that usually requires a long wait on the phone.
Even a visit to the local office of the IRS can be daunting because a taxpayer has to pass through a security search even more stringent than going through TSA at the airport. Credit should be given to the state tax department for placing the paper forms outside of the building so one does not have to pass through security, an idea the IRS should consider as an alternative to putting 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 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 paychecks or paid in estimated taxes. Further, if their income exceeds 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 the lawmakers deemed “rich” people. It was also argued that since taxpayers don’t get to deduct their federal taxes on either the federal or state return, higher-income earners shouldn’t be allowed to deduct state income or general excise taxes.
What lawmakers learned this year is that change to the law didn’t hurt taxpayers, but the charities who depended on the high-income earners for major contributions. After all, 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 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 a 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 is income and what is 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.
Lowell Kalapa is president of the Tax Foundation of Hawaii.