Taxpayers filing a return in Rhode Island face huge changes this year. Reforms the General Assembly passed two years ago - but just now taking effect - include the elimination of itemized deductions, meaning there will be some winners and some losers. Jim Hummel finds that the losers include those with huge medical bills - who now can't fully claim them as a deduction.
There are big changes for taxpayers filing in Rhode Island this year. Reforms enacted two years ago - but just now kicking in - mean there are winners and losers. Among those losers: people with huge medical bills that now can't fully claim them as a deduction.
It was the General Assembly's biggest overhaul of the Rhode Island personal income structure in decades - aimed at lowering a top income tax rate of 9.9 percent, that many believed was driving potential new businesses away.
Sullivan: ``They see the 9.9 percent and they just bypass Rhode Island altogether.''
Rhode Island's Tax Administrator David Sullivan says the legislation, which passed two years ago, is taking effect for tax filers this year.
Sullivan: ``It totally reformed the personal income tax. It brought our top marginal rate from 9.9 down to 5.99 and we talked anytime you do a reform, this wasn't a tax cut, it was a reform of the personal income tax. There are going to be people who pay more under it and there's going to be people that pay less.''
It means 300,000 filers are going to pay less this year and 100,000 - will pay more.
Sullivan: ``For instance, I paid more under the new tax system.''
Hummel: ``Because there has been some skepticism, from people saying this is a shell game, the state really wanted to be able raise more money and there's a little bit of confusion.''
Sullivan: ``Every time we ran the models we were revenue neutral in this tax policy, in the reform. The best information we had, we used tax year 2008 returns, recalculating under the new system, it was revenue neutral, we came as close to being zero dollar change as we could.''
But one of the biggest changes is that Rhode Island taxpayers can no longer itemize their deductions. Sullivan says 60 percent of filers already took a standard deduction and those deduction amounts are now increasing.
For example, under the old system, a married couple filing jointly could claim a $9,550 standard deduction. That now goes to $15,000.
Sullivan: ``If you had $12,000 of itemized deductions now you get a $15,000 standard deduction, you get more of a deduction.''
Hummel: ``If you were up at ($16,000, $17,000, $18,000) you lose out.''
Sullivan: ``You lose a little bit, yeah.''
Hummel: ``So you really have to be up around ($25,000, $30,000) to really have it significantly negatively impact you.''
Sullivan: ``That's correct.''
Boyd: ``And I wanted to know if the people who passed this change were aware that it would affect people like this .''
Kathleen Boyd's mother is one of those who is being hurt by the changes. She has Parkinson's and has been at this East Providence nursing home the past two years. Her expenses run almost $100,000 a year. She hasn't paid any taxes the past two years she's been here because of the huge medical bills. But Boyd got an unwelcomed surprise when she went do her mother's taxes this year.
Boyd: ``She had a zero tax liability federally again for 2011 and I pressed the button for the Rhode Island form and all of a sudden this figure popped up - $1,283 as her tax liability for Rhode Island. So I thought `Oh, there's something wrong, I must have done something wrong.' I went back through the program, and answered all of the questions and again it said `you owe $1,283 for 2011.'"
That's because Boyd's mother - and everyone else with large medical bills - can only claim a $7,500 standard deduction if they file as a single person. Which is why she owes money this year.
Boyd: ``I starting think, my mother can't be the only person in this situation - what about people who might have catastrophic illnesses and have these really immense medical bills.
People go bankrupt because of medical bills in this country - and how could they not be able, in the state of Rhode Island, to take a deduction for medical.''
So she took it to an accountant to see if Turbo Tax had gotten it right.
Hummel: ``When you posed it to the accountant, it probably was not a surprise to him? Had he come across that type of situation?''
Boyd: `` Yes, he said he was hearing a lot about this and actually his words to me were: `I think they didn't think this through very carefully because it's affecting a lot of people.'"
Sullivan: ``Really, there are unintended consequences with this. There are not individuals obviously we wanted to see hurt under this tax reform, but when you do this there will be situations like that. In implementing the tax system the first year that was an oversight on both the Medicaid-eligible people. ''
Hummel: ``And so that is clear in retrospect that's something that just got overlooked?''
Sullivan: ``Right, in dealing with that you communicate to all of the individuals, you communicate to the tax practitioners, one would never think to communicate with nursing home owners.''
Sullivan says they are working to try and help those, like Boyd's mother, with high nursing home expense.
Sullivan: ``We're working now with the Department of Human Services, for some people who are Medicaid-eligible - in helping them out with that situation where the feds and the state will actually reimburse you for the tax you have to pay under the new system, because of the loss in your itemized deductions, specifically relating to the medical care.''
House Finance Chairman Helio Melo, who helped craft the tax reform act, tells The Hummel Report he, too, has heard about some of the unintended consequences of the changes and will look back after this tax filing season to see if modifications need to be made.
Hummel: ``So you, despite your nearly $100,000 of medical expenses, she still owes - yo ustill owe - the state of Rhode Island $1,200?''
Hummel: ``And what do you think about that?''
Boyd: ``I think it's not fair. All her money goes to the nursing home. You're allowed to keep $50. She's a teacher, so she has a small pension, not like the Rhode Island pensions I might add, and social security, so everything goes to pay for the nursing home.''
A couple of other changes this year: if you go to a gambling facility like Twin River or Mohegan Sun and win money, then lose it all, you will still be taxed for your winnings without being able to write off your losses.
Hummel: ``You win $10,000, you lose $10,000, you win $10,000, you lose $10,000, back and forth. At the end of the day or the end of the year you could have won $50,000 lost it all, but you're not able to itemize - has that come across your plate?''
Sullivan: ``We've heard that a little bit, and we've received questions from practitioners and some individuals: `Do you mean I can't offset my losses against my gambling winnings anymore? And we inform they, they cannot.''
But Sullivan, adds, that is also true for filers in Massachusetts and Connecticut.
The other big change is the amount the state is having employers withhold from your paycheck.
With the tax reform, the state decided to increase how much it taken out every week.
Sullivan: `Now we're totally off the piggyback, we have our own stand-alone tax system. We have different rates, different brackets - really no correlation to the federal government anymore, so we had to create from scratch a full withholding system for employers to withhold from their employees' paychecks and to be honest with you, we'll never create a withholding system that's good for 100 percent of the people. Everybody's situation is different.''
Sullivan says the department created a brand new W4 form that Rhode Island taxpayers can use to adjust their withholding.
Sullivan: ``And people should do that, when they fill out their tax return this year and they're getting a huge refund, or they're getting a small refund, or they're owing, it's definitely the time to look at your withholding.''
Hummel: ``So the people who are skeptical and say they're taking my money, what you're saying is if you're entitled to it, it's going to come back to you anyway.''
Sullivan: ``You're going to get it back anyway, so your tax liability is what you're going to pay. If you over-withhold through the year we're going to pay it back to you in February or March of the next calendar year.''
``If you're filing electronically, as the vast majority of us do, expect your return in 7 to 10 days. If you do it the old-fashioned way you'll likely have to wait four to six weeks.
In Providence, Jim Hummel for The Hummel Report.''