North Carolina Scheduled to Reduce Sales and Use Tax Rate on July 1

The NC Department of Revenue reminded taxpayers on Friday May 13 that the State sales and use tax rate is scheduled to decrease on July 1. The announcement is posted on the NC Department of Revenue website. However, July 1 is still several weeks away, so don't reprogram your cash registers yet! The NC General Assembly could still enact legislation to extend the higher tax rate. Legislation has already been introduced to extend the rate through 2013 (House Bill 884, Extend Temporary Sales Tax Rate Increases 2 Years). Check this blog and our Twitter page for the latest developments. Attached is an excerpt of the notice from the NC Department of Revenue.

--- Donna Boyette, CPA, Senior Staff Accountant

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State Sales and Use Tax Rate Scheduled to Decrease July 1, 2011
The general State sales and use tax rate is scheduled to reduce from 5.75% to 4.75% effective July 1, 2011. You are encouraged to check the Department’s website for updates to stay informed of any changes as proposed legislation has been introduced that may affect the State tax rate reduction.

Effective July 1, 2011, the general State tax rate applicable to sales and purchases of tangible personal property, certain digital property, and certain services is 4.75%. As a result, the general State and local tax rate will be 6.75% in eighty-two counties, 7% in Alexander, Catawba, Cumberland, Duplin, Haywood, Hertford, Lee, Martin, New Hanover, Onslow, Pitt, Randolph, Robeson, Rowan, Sampson, Surry and Wilkes Counties, and 7.25% in Mecklenburg County.

Effective July 1, 2011, gross receipts derived from providing telecommunications service, ancillary service, and video programming in this State, and sales of spirituous liquor other than mixed beverages are subject to the “combined general rate” of 7% for every county in the State. The combined general rate is the State’s general rate plus the sum of the rates of local taxes authorized for every county in the State.

Taxpayers that file Form E-500, Sales and Use Tax Return, should report taxable purchases for use and taxable receipts at the 4.75% Gen. State Rate on the existing returns. The Department will not create and provide new returns.

Taxpayers that file Form E-500E, Utility and Liquor Sales and Use Tax Return, should report the tax liability on the existing returns. Prior to August 1, 2011, a worksheet will be created and posted by the Department on its website for use in completing Form E-500E returns.

Additional information regarding the general State sales and use tax rate will be posted by the Department on the website prior to July 1, 2011. Questions about the notice should be directed to the Taxpayer Assistance Call Center at telephone number 1-877-252-3052 (toll-free).

http://www.dor.state.nc.us/taxes/sales/impnotice_2011_05_13.pdf

Roth Part II - To Convert to a Roth or not to Convert – The Answer is Maybe

The Roth IRA has been around for more than a decade, so why have you been hearing so much about it over the last year? Before 2010, taxpayers with AGI, or Adjusted Gross Income, over $100,000 were not allowed to convert or to roll over funds from traditional (deductible or non-deductible) IRA accounts or certain employer-sponsored retirement plans (ex. 401(k) plans) to a Roth account. For 2010 and later, taxpayers of all income levels and filing statuses can convert to a Roth account.

Traditional, deductible IRA accounts and employer-sponsored retirement plans allowed people to exclude their contributions when figuring their taxable income. That is one of the beauties of the traditional IRA and other retirement plans – do not pay tax on the money now, but pay the tax on the withdrawals years later.

So what happens when you convert to a Roth IRA? When the money is converted to a Roth IRA account, income tax is paid on the funds in the year of the conversion. How much tax you pay in the year of conversion is a complex formula based on your tax rate and the value of your IRA accounts at the time of conversion. Only for 2010, the income from the conversion will not be recognized in 2010, but half will be recognized in 2011 and half will be recognized in 2012.

So if you report the converted amount as income and pay income tax, why would you convert? Isn’t better to wait and pay the tax when you withdraw the money from the account? The decision to convert boils down to several questions:
1. do you have the money to pay the tax now from accounts other than the IRA;
2. what do you plan to do with the money in the future;
3. how long do you have until retirement; and
4. what do you think the tax rates will be when you retire.

There is no right answer. In fact, there are several professional software programs designed to help your tax adviser walk through the possibilities to see if a conversion is right for you.

What if you decide you do not want to convert after the paperwork is signed? You can take advantage of the "free look" provisions in the law. These rules allow you to reverse or "recharacterize" your Roth converted amounts back to a traditional IRA. However, the recharacterization must be done by the time you file your tax return, including the extension period.

With concerns about the overall economy, sluggish investment returns, lower retirement account values and potential future increases in tax rates, the time could be right to recognize income today with the thought of finding tax savings in the future.

--- Donna Boyette, CPA, Senior Staff Accountant