Tax changes bring costly surprises

by Wayne Faulkner, Wilmington Star-News, April 11, 2015.

The effects of Obamacare are showing up at tax time as last-minute filers discover they may owe money to the government rather than getting money back.

And changes brought about by tax reform in North Carolina are producing the same problem for some, tax preparers say.

They are two of the main problems tax preparers are seeing as the filing deadline nears Wednesday.

The health care problem lies in the federal subsidies received by many of those insured under the Affordable Care Act.

"The biggest shocker is where people have received some health care prepayment and now they've used it and now have a balance owed, said Marlies Y. Hendricks, a CPA with offices at 2512 Independence Blvd. and Buffalo, N.Y.

When people signed up for health insurance on exchanges, they were asked to estimate their income.

"People who have underestimated their income have to pay back part of the premium tax credit," said Kristine McKay, manager of University Landing office of Liberty Tax Service and assistant to the district manager.

For instance, if your premium for health insurance under ACA was $600 a month last year and, based on your estimated income, the ACA tax credit was $100, you paid $500 out of pocket.

But your actual income at the end of the year may be higher than your estimate, decreasing the ACA credit you should have gotten to, say, $50 a month. In that case, you'd have to pay back approximately $600 for the whole year at tax time, McKay said.

The result? In some cases, those who would normally have received a federal tax refund now may have to pay, both Hendricks and McKay said.

How much? "We're looking at a few hundred dollars," McKay said, and sometimes up to $1,000.

Some clients are not even aware of the possible tax consequences, she said. Others are shocked that they might have to pay back some of the credit.

The effects of tax reform in North Carolina also has surprised some clients, McKay and Hendricks said. The tax reform law have simplified the returns, but many of the deductions and the earned income tax credit that were allowed in the past are gone, they said.

That includes health care expenses. Expenses above 10 percent of taxable income for those at least 65 years old can be deducted on federal taxes, but they no longer are deductible from state taxes.

That has hit seniors especially hard.

In fact, Rep. Rick Catlin, R-New Hanover, introduced legislation during last year's General Assembly short session that would allow those 65 and older to claim medical expenses against their adjusted gross income when filing their state taxes.

His effort failed last year, but he now says the bill has gained support as more legislators learn what it's about.

The reforms also instituted a flat income tax for all North Carolina filers – 5.8 percent for 2014 and 5.75 percent for 2015. It replaced a tax rate that ranged from 6 percent to 7.75 percent.

The result, McKay said, is filers may have gotten more in their pay checks in 2014, but are ending the government at the end of the year.

To help avoid that in the future, she said, "They should look at how many exemptions they are claiming and adjust that."

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