As an accountant, you probably don't want to pass along unpleasant news to clients, especially during tax season. Not everyone ends up with the refund they anticipate when all the numbers are run, though, and this season some taxpayers could end up with a smaller tax refund. Preparing clients early about possible refund surprises can help reduce disappointment.
The news about smaller tax refunds from certain states comes on top of news that some individuals are likely to receive a reduced federal tax refund due to penalties under the Affordable Care Act. That means individuals impacted by the reduced state refunds could be hit with an unpleasant double whammy this year. With regard to state filings, H&R Block published a statement that individuals in a dozen states might see smaller state returns because of late federal legislature action in 2014.
States where a smaller tax refund may be possible are Arizona, Georgia, California, Hawaii, Idaho, Iowa, North Carolina, Indiana, Ohio, Virginia, Wisconsin and West Virginia. The dozen states currently use a process that ties conformity of tax benefits to federal benefits annually, using a fixed date for the changes rather than an automatic conformity process. The problem for 2014 returns deals with tax benefits for teachers, homeowners, students and retirees that were set to expire at the end of the year. Congress acted in the midnight hours of 2014, extending the benefits but leaving the dozen states little time to make changes to their own return processes.
The possibility of a smaller tax refund from the state doesn't alter how and when individuals should file federal returns. The state return process has no bearing on the federal return process, and individuals expecting any type of federal refund should plan on filing tax returns as early as possible to expedite refund payment.
Accountants assisting individuals with filing tax returns in the dozen impacted states may want to consider counseling clients on two possible approaches to state returns. First, if the missing benefits are likely to result in a substantially smaller tax refund, individuals can file federal returns and postpone filing state returns until the last minute. Many states have return-filing deadlines after the April 15 federal deadline, buying additional time to update processes to conform with federal benefits.
If states don't update in time, taxpayers should file the returns as required to avoid fees or penalties. Once states update processes to conform with the federal extensions, taxpayers can file an amended return to receive any additional refund amount owed to them. One benefit of this method is that your clients may receive some portion of their refunds immediately and only have to wait for the portion impacted by the federal benefits.
The smaller tax refund related to this particular problem shouldn't be a problem for 2015 and future returns. The 12 states all have legislation pending to update conformity processes, and Virginia's bill was signed in February 2015.
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