On September 18 the NC Budget funding out state operations for the next two years was finally adopted by the legislature and signed into law by our governor. This 429 page budget bill primarily focuses on the spending by our state over the next two years however there are 21 pages of Finance Provisions that will affect every business and person in North Carolina. In this summary we will examine the provisions that have the widest effect on our clients.
Individual Income Tax Provisions
1. Under the newly adopted budget individuals will receive a higher standard deduction for 2016.
2015 Deduction 2016 Deduction
Married Filing/Jointly/Surviving Spouse $15,000 $15,500
Head of Household $12,000 $12,400 Single $ 7,500 $ 7,750
Married Filing Separate $ 7,500 $ 7,750
2. NC taxpayers who itemize will also once again be allowed to take a deduction for medical expenses beginning with the current 2015 tax year. The medical deduction limits will follow the same rules in place for medical deductions medical deductions by the IRS.
3. For 2015 and 2016 the current individual income tax rate of 5.75% of NC Taxable Income will remain in effect. However, for starting in 2017 this rate drops to 5.499%.
4. Many NC taxpayers found themselves having to write a small check to the state when filing their 2014 income tax returns. This was a result of the income tax tables used to withhold taxes from their paychecks being based on just an employee’s W-2 wages. Starting in 2016 income tax tables will withhold an additional .1% in tax to account for income from other sources such as dividends and interest.
Sales Tax on Services
The 2015-2017 Biannual budgets expand sales tax to many services that are currently exempt from sales taxes. These include repair, maintenance and installation services for vehicles, appliances and other tangible personal property. The revenue from this expanded sells tax will be used to redistribute sales taxes collected from higher wealth counties and cities to lower wealth rural counties. 79 counties and municipalities will receive a share of these newly collected funds and may use it for economic development, public education or community colleges. The expanded sales tax begins on March 1, 2016
Corporate Income and Franchise Taxes
1. The corporate income tax rate was set to drop from 5% in 2015 to 4% in 2016 if state revenue projections were met. The decrease has now been made permanent without regard to state revenue collections. However if new revenue targets are met in future years the tax rate will decrease from 4% to 3%.
2. Corporations that work in multiple states will begin using only their sales by state as the apportionment factor beginning in 2018. Currently multistate corporations base the income allocated to each state they work in using three apportionment factors including sales, payroll and property in each state. The payroll and property factors will be phased out over the next three years.
3. Major changes have been made to the method franchise taxes are calculated for corporations doing business in North Carolina starting in 2017.
As you can see there are a number of changes to the North Carolina Tax laws that will affect every business transacting business in the state and every individual who files a North Carolina tax return. Please call our office with questions or concerns about how these changes will affect you or your company’s particular situation. You can reach us in our Fayetteville office at 910-323-3600 or in our Dunn office at 910-891-1100.
As a small employer, do you have any employees who are not on your group plan, and for whom you either pay their individual health insurance premiums directly or reimburse the employee for their health insurance premiums? Under the Affordable Care Act these payments are not permitted and are subject to a $100 per day per employee excise tax beginning July 1, 2015. This excise tax is applicable to all employers regardless of the number of employees that you have. Other plans that are subject to the $100 per day per employee excise tax are Medicare premium reimbursement arrangements and TRICARE health reimbursement arrangements. Employers who have tried to accommodate employee needs with these plans will have to develop different strategies to provide health insurance their employees.
For more information on this excise tax go to http://www.irs.gov/Affordable-Care-Act/Employer-Health-Care-Arrangements or contact us at TRP CPAs.
Before the fast-approaching new year, it’s important to take some time and reflect on year-end tax planning. The weeks pass quickly and the arrival of January 1, 2015 will close the doors to some tax planning strategies and opportunities. Fortunately, there is still time for a careful review of your year-end tax planning strategy.
Traditional year-end planning techniques
For many individuals, a look at traditional year-end tax planning techniques is a good starting point. Spreading the recognition of certain income between 2014 and 2015 is one technique. Individuals need to take into account any possible changes in their income tax bracket. The individual income tax rates for 2014 are unchanged from 2013: 10, 15, 25, 28, 33, 35 and 39.6 percent. Each taxable income bracket is indexed for inflation. The starting points for the 39.6 percent bracket for 2014 are $406,750 for unmarried individuals; $457,600 for married couples filing a joint return and surviving spouses; $432,200 for heads of households; and $228,800 for married couples filing separate returns. For 2014, the top tax rate for qualified capital gains and qualified dividends is 20 percent.
For the second year, individuals also need to plan for potential net investment income (NII) tax liability. The NII tax applies to taxpayers with certain types of income and who fall within the thresholds for liability. Again, spreading income out over a number of years or offsetting the income with both above-the-line and itemized deductions are strategies to consider.
Many individuals are surprised to learn that some very popular and widely-used tax incentives are temporary. If you claimed the higher education tuition deduction on your 2013 return, you cannot claim it in your 2014 return because the deduction expired after 2013. The same is true for the state and local sales tax deduction, the teachers’ classroom expense deduction, the Code Sec. 25C residential energy credit, transit benefits parity, and more. All of these tax breaks expired after 2013 and unless they are extended by Congress, you will not be able to claim them on your 2014 returns.
Businesses are also affected. A lengthy list of business-oriented tax breaks expired after 2013. They include the Work Opportunity Tax Credit (WOTC), research tax credit, Indian employment credit, employer wage credit for military reservists, special incentives for biodiesel and renewable fuels, tax credits for energy-efficient homes and appliances, and more.
The good news is that Congress is likely to extend these tax breaks, probably for two years, and make the extension retroactive to January 1, 2014. That means taxpayers can claim these incentives on their 2014 returns. One hurdle is when Congress will act. In past years, lawmakers waited until very late in the year, or even until the start of the new year, to vote on an extension of these incentives. Late extension puts extra pressure on the IRS to quickly reprogram its return processing systems. Most likely, the IRS will have to delay the start of the filing season. Our office will keep you posted of developments.
In 2014, the Tax Court surprised many with its decision that a taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer maintained (Bobrow, TC Memo. 2014-21). The one-year limitation is not specific to any single IRA maintained by a taxpayer, but instead applies to all IRAs maintained by the taxpayer. The IRS, in turn, announced that it would change its rules to reflect the court’s decision.
The key point to keep in mind is that the Bobrow decision affects only IRA-to-IRA rollovers. The decision does not limit trustee-to-trustee transfers.
Affordable Care Act
Individuals who obtain health insurance through the Affordable Care Act Marketplace (and the federal government estimates they number seven million) have special tax planning considerations, especially if they are eligible for the Code Sec. 36B premium assistance tax credit. The credit is payable in advance to insurers and it appears that most taxpayers have elected this option. These individuals must reconcile the amount paid in advance with the amount of the actual credit computed when they file their tax returns. Changes in circumstances, such as an increase or decrease in income, marriage, birth or adoption of a child, and so on, may affect the amount of the actual credit.
Remember that the Affordable Care Act requires individuals to have minimum essential coverage for each month, qualify for an exemption, or make a payment when filing his or her federal income tax return. Many individuals will qualify for an exemption if they are covered under employer-sponsored coverage. Individuals covered by Medicare also are exempt.
If you have any questions about year-end planning, please contact our office.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.