COLUMBIA — If you haven't filed your 2017 income tax returns yet, you might want to ask for an extension.
That's the advice from South Carolina's tax-collection agency and the state's top accountants group, which caution lawmakers might change what you owe before they leave the Statehouse in May. While many taxpayers' 2018 returns would be unaffected, changes retroactive to last year's earnings could be substantial for those who are eligible.
"If they file now, they may have to file an amended return with the state," said Chris Jenkins, chief executive of the S.C. Association of CPAs that represents 4,700 accountants statewide.
Questions about returns follow the massive tax reform law passed by Congress last December. For decades, South Carolina legislators have routinely updated the state tax code to conform with any new federal rules.
But this time is different. If the state aligns with the latest IRS rules, South Carolinians could pay an additional $180 million in state income taxes next year, even as their federal taxes collectively shrink by $1.6 billion, according to estimates from the state's Revenue and Fiscal Affairs Office.
That's because the state code would pick up the reform law's changes to deductions and exemptions in calculating taxable income, but not the rate reductions. States set their own rates.
Republicans who rule the Legislature don't want to be seen as taking more out of taxpayers' pockets, particularly in an election year, so they've proceeded slowly. Separate proposals in the House would either conform to federal rules without making any other changes or attempt large-scale tax reform. The chamber's budget-writing committee has yet to debate either.
With time running out before the April 17 tax filing deadline, the state Department of Revenue issued an alert to taxpayers and tax preparers.
Its suggested options include waiting until right before the deadline to file state returns — South Carolina gives electronic filers until May 1 — and asking for an extension that moves the deadline to Oct. 15. Or taxpayers can file now and, if the Legislature passes a conformity law, file an amended return later to get money back.
It's unclear whether the confusion is causing more people to seek extensions. It's common for people to wait until just before the tax deadline anyway to apply, said Revenue spokeswoman Bonnie Swingle.
Most of the federal tax law's recent changes take effect this year, affecting returns that will be filed in 2019.
But some apply to 2017 earnings. The one with the most impact allows higher deductions for medical expenses. The Fiscal Affairs Office estimates 148,000 S.C. tax filers could collectively save $3.5 million in state taxes.
If legislators do nothing, the state tax code will continue to align with IRS rules dating back to Dec. 31, 2016. That would create other problems, both this year and beyond.
Taxpayers might have filed claims involving insurance premiums, college tuition and foreclosure debt, not realizing they shouldn't have. While not new, those provisions had expired. A law passed by Congress last month retroactively renewed them, but it won't apply to state taxes if legislators don't update state law, the Department of Revenue warns.
For the future, failing to tie the state and federal tax codes will require businesses and individual tax filers to keep "two sets of books," Jenkins said.
"These being out of alignment create a ton of additional work for people and businesses," he said.
For taxpayers who don't hire accountants, the dual systems could be especially confusing, said Frank Rainwater, director of the state's Fiscal Affairs Office.
"We’re concerned taxpayers would not carefully consider those changes, causing more errors and more delays" in tax collections, he said.
Rainwater also worries about the Department of Revenue's ability to make the necessary adjustments in time for next tax season.
"For Revenue to now pick up what they've relied on the IRS to do, to add a new form, to amend their tax systems, to share that with vendors so Turbo Tax and others can develop their system to match, and for DOR to make the changes to accept all that by (next) April 15 is asking a lot," Rainwater said.
S.C. Chamber of Commerce is pushing lawmakers to conform state taxes with the new federal rules.
"We're concerned the General Assembly will take the easy way out and just do nothing," chamber President Ted Pitts said. "It's a very burdensome process to file two separate returns, and the compliance required, if we don't conform."
But the chamber wants the bill to also cut taxes in a way that will prevent the state from collecting that estimated $180 million.
The net increase comes from how South Carolina is tied to the federal code.
South Carolina, unlike most states, bases tax collections off "federal taxable income," meaning the state's more than 2.2 million filers are taxed only on what’s left after home mortgage interest, property taxes and various other federal deductions and personal exemptions are subtracted. State law then adds some generous tax breaks on top of those. But the December tax law substantially altered what's federally taxable.
Jenkins encourages state legislators to pass a law that simply conforms to the federal changes and hold off on the tax reform debate. Final IRS rules tied to last December's law could reduce or eliminate the extra $180 million that S.C. taxpayers are forecast to owe, he said.