Missouri, North Dakota, Oregon . . who's next?

Just in the past week or so, we've become aware of three more states that have made 2018 state income tax withholding changes:

Missouri:

Missouri was one of several states that initially deferred making any first of year changes for 2018. 

Missouri has since made sweeping changes without any accompanying explanation other than that the changes were made as a result of the federal tax reform bill signed on December 22, 2017.  The state further indicates that if the IRS makes additional calculation adjustments, more changes could follow.

Missouri essentially doubled standard deductions (four different types including a distinction for married individuals depending on whether the spouse works or not; only one other state to our knowledge makes that distinction) but also completely eliminated any deduction for personal allowances.  They also lowered the top incremental rate from 6.0% to 5.9%.  In one sense this is logical if a state's view is to mimick what the federal system does and is trying follow what the law says (since personal exemptions are going to be eliminated at the federal level), yet it also really doesn't (since the federal withholding formula is still taking them into account).   What it basically means is that now in Missouri, and unlike the federal withholding tax logic, additional allowances basically mean nothing in that the state withholding tax calculations are essentially identical regardless of the number of allowances claimed.  So if you analyze some of the tax tables the state has now published, the difference in tax calculations for Single, Married (see more below) or Head of Household, whether an employee claims 0 exemptions or 10 exemptions, the withholding amounts are all almost exactly the same.  This is a result that normally would be completely unexpected for any state where employees can claim state withholding allowances, and is therefore somewhat unprecedented.

Missouri's updated MO W-4 form (some states have their own withholding form, some just use the federal form) still asks for the number of additional allowances for dependents and a separate line for other allowances.   But it appears that those answers mean very little in terms of MO withholding calculations.

With respect to the two Missouri "married" types:  if both spouses work, the status in Advanced Accounting should be identified as a "B" versus an "M" if the spouse does not work.  There are big differences in the calculation between MO state income tax withholding for a "B" status as compared to an "M" status, although the calculation is of course identical for federal income taxes (where a "B" simply becomes an "M").  It is on line 2 of the MO W-4 where an employee indicates whether a spouse works or not.  But it asks the employee to enter a "1" if a spouse does not work as if it is an allowance.  That really doesn't make any sense because the critical distinction for the two types has nothing to do with "allowances" per se, but rather puts the employee into an entirely different category.

Advanced Accounting has been updated internally both for the significant logic and other changes along with an accompanying tax table update that is also required.   Missouri payroll users will need to contact us to obtain this update.

Missouri has a fairly helpful on-line withholding tax calculator that we wish all states had, and their web site indicates that it has been updated for these recent changes.  We have used it fairly extensively to test changes we made in Advanced Accounting to ensure that our computations were matching theirs.  Something that is odd about the calculator, however, is that it asks for the computed federal income tax withholding (FIT).   Yet the Missouri formula in effect does not consider FIT, and we have found we can input almost any value in the calculator for the federal tax amount and it usually makes little to no difference in their calculation, which is very confusing.

MO employer reference page: http://dor.mo.gov/business/withhold/

North Dakota:

North Dakota on Jannary 3, 2018 had indicated that it was going to delay releasing its 2018 income tax withholding, and it put out that notice since it is a state that normally publishes changes every year.  At some point after the release of the updated IRS Publication 15 aka Circular E (which came out on January 25), North Dakota revised their rates which also included a revision of their supplemental wage rate (involves some internal logic, not a table change).  North Dakota's logic is fairly simple.  They are one of many states that still have a standard deduction similar to the federal amount which was raised, accompanied by some tax table changes.  Advanced Accounting users in North Dakota will need an update from us to handle two of these changes even though the biggest changes relate to user maintainable table limits/rates.

ND employer reference pagge:
https://www.nd.gov/tax/user/businesses/formspublications/income-tax-withholding/guidelines--publications


Oregon:

Oregon was off the radar in terms of making 2018 changes, but made changes effective February 1, 2018.

Oregon has one of the more complex and difficult to follow formulas which is really very much unlike any in the country (although there are some other states that fall into this category as well), and there are many inconsistencies in the explanation of the formula.   Since we have long supported the Oregon formula in Advanced Accounting, the changes should have been fairly easy to implement, even though there were a great number of changes to rates and amounts.

We realized however in trying to test withholding amounts that despite having spent a significant amount of time trying to implement the formula in the past and despite how the Oregon instructions are presented, a single employee with 3 or more allowances receive the same base and other logic "as if" married.   No other state has logic like this that we are aware of, and this came out in testing.  After making preliminary changes, we were getting the same results as some of Oregon's tables for a status of Single or Married with 0, 1 or 2 allowances (which all produce different, matching results as expected).  But for 3 or more, the distinction supposedly goes away (but yet it doesn't).  And Oregon's published tax tables reinforce that concept by having an unusual presentation for 3 to 14 allowances, with the amounts in those pre-calculated tables shown as the same for single or married.  BUT:  the Oregon formula specifically includes consideration of the FIT computed for a given pay period.   And the federal calculation continues to be DIFFERENT for employees with a status of Single versus Married and has no concept like Oregon's in that respect. Therefore, the pre-calculated amounts cannot possibly be the same for a Single status with 3 or more allowances as someone with a Married status with 3 or more allowances, contrary to how they are portrayed in the tax tables. The "computer formula" that Oregon outlines should resolve that problem as most Oregon employers are probably not manually still looking up withholding amounts from tables.  But this causes considerable confusion in trying to interpret the formula that is presented and verifying results, which is already far more complicated than it needs to be.

The Oregon withholding amounts are completely logic driven and do not, and really cannot, easily rely on normal withholding tables which is why there are no "OR" tax tables under Advanced Accounting's PR-K "Maintain tax tables" option. 

A 2018 payroll update for Advanced Accounting is available for Oregon, and Oregon users will need to get in touch with us to obtain that update.

OR employer reference page:
http://www.oregon.gov/DOR/programs/businesses/Pages/payroll-updates.aspx


Comments:  

A state like Mississippi has not made any 2018 changes because their withholding formula doesn't rely on a federal income tax computation.  Nor does Montana, and others.   Utah would be another example where rates have not changed (since 2008) except for one big glaring discrepancy:  Utah's actual individual income tax filing, but not withholding, includes an adjustment for federal income tax paid during the year.   So unless it makes some changes, they will be discrepancies in amounts withheld compared to amounts owed (more so than normal) in 2018.

Unless it is required by a state's statute (although statutes can be changed), is nonsensical for states to include in their withholding formulas any amount that relates to the federal income tax.   Why? These are completely unrelated and disparate systems.  Surely state legislators and tax commissions, in those states which have state income tax (and most do), could easily come up with formulas based on projected/needed revenues that do not in any way need to rely on, nor include consideration of, projected nor actual federal individual income tax amounts. These are archaic approaches that need to be changed not only to simplify calculations that will still lead to the same tax payments/revenue but would avoid the needless chaos, confusion, and cost that arises just because of back and forth swings in federal income tax calculations.  This is not a state vs. federal issue, simply that the two taxes are completely separate and unrelated, and one should not in any way rely on the other.  The elimination of any reliance on federal changes includes both (a) standard deduction amounts (many states still use an amount that parallels the federal amount) and (b) federal income tax calculation/projections. 

Why put your state into the position of having to revise your formulas every year just because of some federal change?  

Louisiana releases updated withholding tables

On Feburary 15, 2018, the Louisiana Department of Revenue (LDR) announced updated tax tables and formulas that were effective February 16, 2018.   The changes were made to make adjustments in light of changes in federal income tax laws that will impact 2018 income tax returns.

Louisiana's withholding methodology is unique and, like a number of states that have state income tax withholding (most do), it requires special programming logic.

In reviewing our existing Louisiana state income tax logic, we realized that it needed to be completely changed to not only correctly accommodate the recent changes but also to more accurately compute the required withholding.

A description of the logic taken from the recently published tables is contained below:

A link to the full 2018 LDR document is referenced below:

http://revenue.louisiana.gov/LawsPolicies/1802EMR030.pdf

Unlike withholding at the federal level and most other states (although there are exceptions), Louisiana separates dependency "credits" from "personal exemptions."  In most states, there is a single number for state allowances ("or exemptions") and often the number claimed by employees is the same as the federal amount.  Those allowances are usually indicated under "St" in the Advanced Accounting PR-A employee maintenance screen.

For Lousiana however the "St" value will now be used only for dependency credits. This is the number contained on Block B of Louisiana form R-4.   This is the number of dependents (as defined by IRS code) the employee will be claiming on their Louisiana tax return other than the employee or a spouse.  Personal exemptions should be entered under SSEx with these possible values:  0-none 1-employee 2-employee and spouse (i.e. the Block A value on form R-4). A value of 2 can only be entered as a personal exemption if the employee's marital status is "M" (married); a single employee can only claim 0 or 1.    A married employee can also claim 0 or 1, but one of the unusual aspects of the LDR logic is that in that event, the state income tax logic reverts to being the same as if a single employee.  

The 0 or 1 personal exemption election falls then into a different logic flow than a claim of 2 personal exemptions.    If the employee claims no personal exemptions but does claim dependency credits, the LDR's tax tables do not provide guidance as to the amount to withhold, but Advanced Accounting will nonetheless calculate the tax based on the formula logic.   Each additional state withholding allowance reduces, on an annualized basis, the tax withheld by $21. The selection of a personal exemption of 1 or 2 however then starts the calculation at a lower level, with some different rates and tax bracket logic applying to different wage bracket tiers.

In order to verify that the rewritten logic implemented in Advanced Accounting's PR-B was accurate, we had to modify the FIT/SIT calculator recently introduced in the software to take into account the separation of the dependency credits from the personal exemptions as outlined below.

In order to compare the withholding formula results to the tax tables provided by LDR, use the wages in any given bracket that is the average of the min. and max. values.  So for the bracket 18,501 to 18,900, in the calculator use 18,700.  For an employee claiming no personal exemptions (regardless then of marital status) and no dependency credits (i.e. state allowances on the screen above), the Louisiana state income tax is $504.30 (annualized) which exactly matches the table amount for that bracket. Changing the personal exemption to 1 reduces the calculation to $409.80.  Adding one state allowance (dependency credit) results in a value $21 less or $388.80. Changing the marital status to M and claiming 2 personal exemptions and no state allowances results in a calculation of $222.40.  Adding a dependency credit reduces that amount by $21 to $201.40.

We have further tested the updated program using salaries in all ranges that the LDR tax logic impacts, and with both 0, 1 and 2 personal exemptions in those ranges to verify accuracy.

A software update for Louisiana users is now available which includes an update to both Advanced Accounting's PR-A and PR-B program options.  Existing users will, after installing the new update, need to check each employee to ensure that the "St" value now only contains values representing Block B elections and the Block A election amounts are moved to the SSEx field for employees who belong to a division with a state code of LA.

In states like Louisiana where different types of allowances or exemptions may apply, this means that both the state L-4 and the federal W-4 will need to be completed by employees.  And since the recent federal tax law changes have eliminated personal exemptions, confusion and questions will likely follow.