Most state taxes can't be completed until the federal 1040 is done.(Photo: Thinkstock)
State tax refunds may be a surprise victim of the federal "fiscal cliff."
Federal
and state tax systems are so intertwined that taxpayers will find it
nearly impossible to file a state tax return - or get a timely refund -
until Congress resolves the current fight over tax policy.
Most
of the fiscal cliff fight involves tax rates for 2013. That doesn't
affect your ability to file this year's return. But Congress also needs
to retroactively settle a few 2012 tax issues - deductions, credits and
the Alternative Minimum Tax (AMT). Until this is done, it will be hard
to file either a federal or state tax return.
Forty-one states
and Washington, D.C., have income taxes, collecting $300 billion in
2012. All of these governments have finished their rules, set rates and
are ready for taxpayers to file.
About
two-thirds of state income tax filers get a refund. The amounts are
smaller than the average federal refund of $2,707 last year, but still
substantial: an average of $1,146 in Maryland, $831 in California and
$314 in Ohio.
For simplicity reasons, nearly every state uses
"federal adjusted gross income" as the starting point for computing
state tax liability. With federal tax law up in the air, how to compute
that crucial number - what goes on Line 37 of the federal 1040 form -
will remain a mystery to many taxpayers.
"Theoretically, you can
file state and federal returns separately. In reality, the two systems
work in concert with each other, so it's hard to separate them," says
Harley Duncan, managing director of state tax issues at KPMG, a tax
advisory firm.
Tax preparer H&R Block is encouraging clients
to wait to file state and federal returns together, says Mimi Nolan,
director of the company's Tax Institute. TurboTax has created a "red
light/green light" system in its software to tell users if, in the
estimation of TurboTax's 150 tax analysts, it's OK to file a state
return before federal law is set.
"Tax refunds are the biggest
payday of the year, bar none, for 60 million people living paycheck to
paycheck," says TurboTax Vice President Bob Meighan. "This money is
critically important to people paying rent, paying down debt and other
expenses."
But tax law is so complicated that even the 96% of
taxpayers who don't use the deductions currently being debated can get
tripped up on unsettled issues, such as whether the sales tax can be an
itemized deduction and the AMT.
Some examples of state returns and refunds thwarted by the current debate:
•
Many states require attaching completed federal tax forms to state
returns. Example: North Dakota requires the federal 1040. New Mexico
wants Schedule A. New Jersey wants Schedule B. New York wants Schedules
C, D, E and F.
• The IRS runs the electronic filing system used by
states and 80% of taxpayers. The IRS is supposed to start accepting
federal and state electronic returns on Jan. 22. If Congress doesn't
act soon on the AMT, the IRS will need until March to reprogram its
e-file computers - a delay that would block millions of state returns.
"The
AMT is the bug-a-boo," says Verenda Smith, deputy director of the
Federation of Tax Administrators, a coalition of state tax collectors.
States don't use the federal AMT to compute taxes, but they rely on the
federal electronic filing system to be at full speed during the peak
filing period in mid-February.
"Our state return is indivisible
from the federal return," says Gary Gudmundson of the Ohio Department of
Taxation. "It's not like you can do one without the other."
USA Today