Another Tax day has come and gone, and it was a bit more dramatic than usual. A computer error led to major e-filing issues and a last-minute extension on April 17. State income taxes played a much more significant role in many people’s tax calculations this year. And, of course, there’s also a new tax code coming into effect.
As such, it’s important to reflect and look back at everything that happened to the tax system in the past year.
States Scramble To Adapt
What does the federal tax law have to do with your state return? The new tax code didn’t affect your 2017 income, and some people are using that to their advantage. The new law caps deductions from state and local taxes (SALT) at $10,000. As a result, many homeowners prepaid some 2018 property taxes this year in a bid to get every penny they could from itemized deductions. In addition, this sudden pre-payment has wreaked havoc on many state’s carefully engineered revenue projections.
According to Reuters, taxpayer actions in response to federal income tax changes passed by the U.S. Congress late in 2017 are expected to force states that tax personal income to reset their overall revenue forecasts.
President Donald Trump signed the federal tax bill into law on December 22, 2017, and impacted the majority of states during the middle of their fiscal year.
“There’s so much going on with this tax act that states are having a difficult thing figuring out what’s going on,” said Ron Alt, a senior manager of research at the Federation of Tax Administrators.
The fallout over the bill’s deduction changes will be much more evident in the weeks following the tax filing deadline, as states begin to revise their past and upcoming fiscal year revenue projections. Additionally, there was a significant jump in estimated income tax payments by high-income earners attempting to maximize deductions throughout 2017 (before the cap took effect). Estimated income tax payments increased nearly 70% in December 2017 compared to December 2016.
“We have never seen such a growth rate in a single month,” added Lucy Dadayan, senior research scientist at Rockefeller Institute of Government, which tracks state revenue.
Back in 2015, corporate income taxes comprised roughly 11% of the taxes collected by the federal government.
A total of 41 states tax both wages and salaries, while Tennessee and New Hampshire only tax dividend and interest income. There are seven states that do not collect an individual income tax at the state level: Florida, Alaska, Nevada, Wyoming, South Dakota, Washington, and Texas.
No matter what state the extremely wealthy live in, though they might not have to pay income tax, they will have to pay federal estate taxes. Unless an individual’s estate is valued at more than $5.43 million — or $10.86 million for a married couple — then they are exempt from federal estate taxes.
There Was a Computer Error, So I Can File My Taxes Late, Right?
Additionally, everyone filing taxes at any point, no matter their income level, should be fully aware of potential penalties.
“If you owe more than $1,000 at the end of the year and you don’t qualify for one of the [exceptions], you will be penalized,” added DeDe Jones, certified public accountant and managing director of Innovative Financial in Lakewood.
The IRS can assess underpayment penalties above the $1,000 threshold unless you earn below $150,000 and paid 90% of the current-year tax burden or 100% of last year’s tax bill; or you earn more than $150,000 and paid at least 90% of the current-year tax burden or 110% of what you paid last year.
Also, though the new tax bill lowered individual tax rates and created a deduction for qualifying earnings for solo workers, it’s still quite easy to owe the government. So everyone needs to be careful when filing their taxes. As long as your net income is at least $400, you’re subject to the 15.3% self-employment tax, as well.
This year’s Tax Day was even pushed back one day because of a major computer crash at the Internal Revenue Service (IRS).
According to National Public Radio (NPR), individual tax filers had a little longer this year to get their paperwork into the IRS after the agency’s website made it impossible for people to both view their records or make tax payments for most of the day on Tuesday.
“Individuals and businesses with a filing or payment due date of April 17 will now have until midnight on Wednesday, April 18,” the IRS said in an official statement. “Taxpayers do not need to do anything to receive this extra time.”
The website starting experiencing major problems early on Tuesday and key services were inaccessible for the majority of the day. The site was fully functional by evening Eastern time.
“This is the busiest tax day of the year, and the IRS apologizes for the inconvenience this system issue caused for taxpayers,” added David Kautter, acting IRS Commissioner. “The IRS appreciates everyone’s patience during this period. The extra time will help taxpayers affected by this situation.”
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