Why was my 2014 NC Tax Refund much less than usual?

One question I've gotten numerous times this year is, "where did my NC tax refund go?" It seems like the majority of people who have come to expect large refunds on their NC taxes have found themselves with a minimal refund instead, or they owe additional tax for the fist time in a long time. The reason is almost always related to the NC tax law changes that went into effect in 2014, but it can be surprising just how many ways the new law may have affected you. Here are some examples:

  1. The NC tax rate decreased to a flat 5.8% from a graduated rate of 6, 7, and 7.75%.
    • This (obviously) would not increase your taxes, but it was not as significant of a rate decrease as it may have seemed. For married taxpayers with taxable incomes of $100,000 or less, the rate decrease was on average 1% or less. 
  2. The changes caused W-2 wage earners to complete new NC-4 withholding forms for 2014, changing - and decreasing - your withholding rate.
    • The effect here is that your paycheck throughout the year may have increased slightly per pay period, but your decreased withholding may have led to a lesser refund at year end than anticipated. Your total tax may have decreased, but because your withholding decreased as well, it may have been paid out "up front" on your paycheck rather than by filing for a refund in April. 
  3. The "Net Business Income" Exclusion was phased out
    • In 2012 and 2013, the State of NC allowed self-employed taxpayers to exclude $50,000 of their net business income (profit) from their NC tax return. This had a maximum tax savings of $3-5,000, and if are self-employed you would have seen a sharp rise in your 2014 NC State Taxes as a direct result of this exclusion being revoked.
  4. Personal Exemptions were removed for NC purposes, certain itemized deductions were disallowed or limited, and the standard deduction was increased to $7,500 Single / $15,000 Married.
    • The bottom line with these changes are that if you already claimed a Federal itemized deduction, then you saw no benefit from the increased standard deduction while losing the benefit of your $2,500 personal exemption. Additionally, you may have found certain itemized deductions now limited for NC purposes.
  5. The deduction for contributions to a NC 529 College Savings plan were removed.
    • Taxpayers contributing to their children's college savings plan (NC 529 Plan) have been used to seeing a $2,500 deduction per taxpayer on their return. This deduction was revoked under the new tax law changes.

There was a lot of moving pieces in the 2014 NC Tax Law changes and it affected each taxpayer in different ways. Hopefully the information above clarified how your personal tax situation was affected. If you would like further information or to discuss tax planning for 2015, please give me a call!