Your Taxes and the Government Shutdown
The current federal government partial shutdown is affecting the IRS and your taxes. On January 7th the IRS announced that they will accept tax returns starting on January 28th. The IRS will issue refunds on schedule. There are other issues that might hold up returns. The IRS has recalled furloughed workers by changing their status to essential in order to move the tax season forward. These formerly furloughed employees are unpaid.
The Tax Cut and Jobs Act of 2017 plus the administration’s initiative to change the tax returns to the “postcard” caused multiple changes to tax returns. While some forms and regulations are ready, some are still in draft and not ready for tax season. This in turns causes tax preparation software companies and tax professionals such as Enrolled Agents and CPAs to not know how to handle some new issues such as the Qualified Business Income Deduction.
Some forms such as the new Schedule 1, Schedules A and B will be released on January 16th. Will that happen? Who knows. Other forms including ones for the Rentals and Royalties, Alternate Minimum Tax, Depreciation, Business Use of the Home, and for Non-deductible IRA contributions are not final and not yet scheduled for release. These will likely be further delayed.
The bottom-line is that there are still some unknowns for the upcoming tax season and delays seem inevitable as of now.
If you are curious you can read more at https://www.irs.gov/newsroom/news-releases-for-current-month
Beware of thinking it is Tax-Free
Sometimes tax-free is not always tax-free. With taxes, sometimes items might be tax-free to one taxing jurisdiction and taxable to another. For example, in Illinois IRAs or other Retirement distributions are free from state income tax while taxable at the federal level. Sometimes there might be another type of tax or penalty. For example, someone out of work might be able to draw money out of an IRA without any income tax because of the low income for the year. If they are below the age 59.5, they might have to pay a 10% penalty for early withdrawal if no exceptions apply.
Folks often misconstrue tax-deferred as tax-free. As an example, if a taxpayer contributes to a tradition IRA, the contribution is not subject to current income tax. The money is able to grow inside the IRA without any taxation as it grows over time. When the money is later withdrawn, ordinary income tax rates apply to the distributions as in the year originally earned. In an IRA there are no capital gains. The ordinary tax rate applies to the whole withdrawal including the growth amount.
Also annuities that are outside of retirement plans are tax deferred but not tax-free. In Illinois only employment related retirement accounts are truly tax free. Annuities outside of retirement accounts are taxed on the amount of grown above the original premium/contribution. In Illinois the tax is the standard 4.95% rate. Additionally, they are subject to the applicable federal ordinary income tax rate.
