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When the Government Shuts Down, the Vulnerable Suffer the Most

Michael Dedmon | Policy Manager| The Financial Clinic

While a partial shutdown of the federal government dominates the daily news cycle, the real impact on people’s lives can be hard to see because many essential services continue to function – more or less – as normal. For example, the U.S. Postal Service is still running, Social Security payments continue to be made, many Veterans’ services are still available, and federal employees deemed essential like federal transportation safety workers and military personnel continue to report to work each day. But, beneath the surface, this staged political crisis is already generating more significant consequences than many realize, and the risk of a deeper national crisis rises every day the impasse continues.

Up to 450,000 of these government employees won’t be receiving a paycheck this Friday despite working throughout the shutdown, and there are thousands more who have been furloughed while the negotiations over reopening the government continue. Although the majority of the furloughed and all essential employees will receive back pay for the time lost to the shutdown, many staff working for government contractors, like cleaning and food service employees, will not. This loss of income presents a huge risk to these less financially secure employees who already receive significantly fewer protections and are paid much less.

Nearly 80% of Americans report that they live paycheck to paycheck, and over 40% of families lack emergency savings, claiming that coming up with $400 would pose a significant financial burden. Like many workers across the country, federal employees have seen their incomes stagnate in the past decade, allowing them even less flexibility to deal with unplanned instability. This sudden shock to their income will force many of them into tough financial choices like whether they should pay their rent and utility bills or buy groceries. Like so many other households dealing with income volatility, many families will be forced to rely on risky and expensive credit products to make ends meet.  As the shutdown drags on, it’s critical that we not lose sight of the very real impact this disruption has on the financial lives of federal employees and their families, and consider the long-term effects some will feel after the political disputes are resolved.

In addition to these affected employees, a number of vulnerable households across the country that rely on government services will soon start to feel the consequences of the shutdown. The Washington Post reports that the Department of Housing and Urban Development (HUD) is scrambling to prevent the eviction of over 1,000 people receiving support from a federal program that ended on January 1st, and in just weeks, millions of SNAP beneficiaries could face reductions to their benefits. Also, with tax season just around the corner, the IRS is both unable to process tax refunds and will have to delay critical support it provides to nonprofits, like The Financial Clinic, that participate in the Voluntary Income Tax Assistance (VITA) program. The Post has reported that over 90% of Internal Revenue Service (IRS) staff has been sent home without pay just weeks before tax season begins in earnest.

This is especially poorly timed this year as changes to tax law passed by Congress in late 2017 spell a number of important changes that may impact low- to moderate-income (LMI) households this season, including the elimination of the personal exemption, the introduction of new tax brackets, and alterations to the Child Tax Credit. “With the new tax law changes starting this year, VITA customers will be looking to their tax preparer to learn what the changes mean for them. ‘Why is my refund changing?’ Many will not think to ask the question of how will this impact their future refunds.” says Darren Liddell, Director of Program Innovation at The Financial Clinic. “Also, refunds won’t be issued while the government is shut down even though the government will still accept the returns.”

Credits claimed at tax time like the Earned Income Tax Credit (EITC) can make up 12% of some households’ yearly income and present a huge opportunity to get ahead financially, save some money for future goals like education and retirement, or pay down debt. Financially insecure families expect a properly functioning federal government to process their returns and issue their refund just like the IRS expects them to file on time. “We see the biggest rush for VITA services right at the beginning of tax season, so in late January, as many customers want to file as soon as they can,” according to Darren. Families looking to get on top of debt accumulated during the holiday season, make some headway on yearly savings goals, or make education/childcare payments for the semester will be relying on receiving their refund.

The financial pain inflicted on government employees, a looming shutdown of some housing and nutrition programs, and the disruption of the tax season are real consequences that will have a lasting impact on the lives of some of our most vulnerable friends and neighbors. The human impact should be considered with the knowledge that all of it is, in fact, needless, as the shutdown is the result of a manufactured, partisan crisis over a poorly conceived and racially charged plan for border security. We call on all representatives in Congress to fulfill one of the most basic tasks entrusted to them: provide the resources to deliver the critical services Americans everywhere rely on and reopen the government without delay.

What to Expect When You File Your 2018 Taxes

By Darren Liddell | Director of Program Innovation | The Financial Clinic

Happy Tax Day! The heart of 2018’s tax season is almost over and as Volunteer Income Tax Assistance (VITA) programs begin to wrap up this tax season and prepare for next year, there are many tax changes on the horizon.

In late 2017, Congress passed the Tax Cuts and Jobs Act (TCJA). The TCJA  marks a shift in tax law that will both negatively and positively impact the taxpayers who come to VITA sites. These shifts include changes to tax brackets, the reduction of some tax credits and deductions, and increases in others. You may be wondering what you need to do to prepare for next tax season and how these new changes in tax law will impact you and your family. Let us bring some clarity to the changes for you.

What you need to know as you close out your 2017 return:

  • First, if you have yet to file your 2017 tax return, please keep in mind that the new tax bill changes do not affect your current year’s (2017) tax return.
  • One of the most important things to keep in mind for tax year 2018 is that health insurance is still a requirement. If you do not have health insurance in 2018, you may have to pay a penalty on your 2018 tax return. This will be treated the same as this year’s taxes, including some exemptions for certain taxpayers who qualify. In 2019, the health care mandate will be eliminated.

Key changes that will take place when you file your 2018 tax return:

  • The way that the IRS calculates many deductions and credits will change. Most notably, the standard deduction will be larger (see table 1 below), however, personal exemptions ($5,400 per person claimed on you return in 2017) have been eliminated. Additionally, if you have non-child dependents, you may qualify for a new $500 per person credit. What does all of this mean for you? See the paragraph below for information on who will be most impacted by the changes.
    • Table 1:
Filing StatusTax Year 2017 Standard DeductionTax Year 2018 Standard Deduction
Single$6,350$12,000
Married Filing Jointly$12,700$24,000
  • If you have children under age 17, you may qualify for a larger Child Tax Credit that will increase your refund, however, if your children do not have Social Security Numbers, you will no longer be able to claim the Child Tax Credit. This will significantly reduce tax refunds for families of children with ITINs.
  • Your tax bracket, which determines how many dollars in taxes you are responsible for paying throughout the year, may change.
  • If you are self-employed, the amount of income tax you are responsible for may be reduced because of the changes in the new tax bill regarding pass through businesses. However, it’s important to note that self-employment tax will not be reduced.
  • One of the most important behind the scenes updates in the tax bill is a change in the calculation of interest by the IRS. Over time (it will take 5-10 years for customers to really feel the changes) tax break thresholds will rise slower and all numbers adjusted for inflation by the IRS will be less. So, some individuals eligible for deductions and credits will lose their ability to benefit from the tax cuts if they make above $12,000-$24,000, depending on their filing status.

Recommended action steps to prepare for the 2018 tax season:

Taxes are immensely personal and the impact of these changes will vary based on your income, household size, number of children, and eligible tax credits. The biggest benefits to  low- to moderate-income households will be the increase in the refundable portion of the Child Tax Credit – $1,400 (post-tax reform) compared to the $1,000 refundable portion of the Child Tax Credit from 2017’s “old” law, which could potentially mean a larger tax refund for customers with children 16 and under. Those with small businesses may pay less in income taxes. The amount of small business taxes should remain about the same, and in the short-term, small business owners will pay fewer taxes than in recent years.

The biggest losses to low-to-moderate-income households include the elimination of the personal exemption, which will affect parents and multi-generational families with dependents over the age of 17, and those taking care of elderly parents.  These households will end up paying more in taxes when these new rules go into effect. The decreased impact of itemization due to the increase in the standard deduction and the elimination of some prior itemized deductions will make many ineligible for itemization. Those eliminated include casualty and theft losses (except those attributable to a federally declared disaster), unreimbursed employee expenses, moving expenses, and employer-subsidized parking and transportation reimbursement.  The Joint Committee on Taxation estimates that 94% of households will claim the standard deduction in 2018, up from about 70% now.  Finally, while most customers are expected to receive higher refunds and pay less in the tax year 2018, many of the tax changes that benefit individuals are set to expire between now and 2025, meaning that unless those provisions are extended, most moderate-to-middle income taxpayers should expect to be paying a lot  more in taxes 5-10 years from now.

Still need to complete your taxes? To find a free tax site near you please call 311 or visit irs.treasury.gov/freetaxprep/.