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Are the voters more clueless than the politicians? August 10, 2014

Posted by forwardfinancialplanning1 in Income Taxes, State Income Taxes.
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It’s usually pretty difficult to defend anything that takes place in Springfield, Illinois but we just came across one that suggests that the politicos are merely manifesting the ignorance of their electorate. According to a survey by Capitol Fax, barely one third of Illinois residents 65 and older know that their pensions, Social Security payments and retirement plan distributions are not taxed by the state of Illinois. Just over 50% believed their retirement income was being taxed and of that half, 83% said their state income taxes were “too high.”

With the state’s “temporary” tax increase (to 5%) on everyone else’s income slated to sunset on December 31, 2014, it looks like the Springfield gang will have a hard time attracting support for an extension from the senior crowd. If 0% is judged too high, it’s going to be impossible to torture the math enough to create something acceptable to this voting bloc.


Save taxes and benefit charities May 26, 2014

Posted by forwardfinancialplanning1 in Federal Income Taxes, Income Taxes, State Income Taxes.
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Many people tells us that they are unable to itemize federal income tax deductions as their eligible combined deductions do not exceed the standard deduction. While this situation certainly occurs for many, some taxpayers may successfully itemize by “bunching” their deductions into one particular calendar year. Business owners can often control the timing of income and expense realization in order to group deductible expenses into a particular year. But, what if you’re not a business owner?

Donor advised funds might be the solution for those who are charitably inclined. The tax payer creates the donor-advised fund with an initial contribution which might possibly represent multiple years of planed giving. However, the IRS permits a tax deduction for the entire amount in the tax year that the contribution is made to the donor advised fund. The donor subsequently directs grants from the donor advised fund to their desired charitable recipient. In this way, the donor may have a total of itemized deductions which exceeds the standard deduction for the specific tax year. Contributing highly appreciated securities is a very tax efficient strategy for placing money in the donor advised fund, as the contributor avoids capital gains taxes on the securities’ appreciation. And, they can deduct the entire value of the contributed amount.

Retiree Tax Planning June 19, 2013

Posted by forwardfinancialplanning1 in Retirement Spending, State Income Taxes.
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Retirees may have some control over their tax burden if they are geographically flexible. Often, they flock to one of the states that does not have a state income tax, such as Florida or Texas. However, income taxes aren’t the only taxes we pay. Sales, property and inheritance/estate taxes also constitute potential tax bills for seniors and should be considered. Kiplinger’s web site offers a very convenient summarization map that provides many of the useful details needed. Check it out at Kiplinger.com/tools/retiree_map

Still more accolades for our “leaders” in Springfield….. November 30, 2012

Posted by forwardfinancialplanning1 in Pensions, State Income Taxes.
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Many of our readers are “fortunate” (as we are) to reside in the state of Illinois.  Doing so gives us a front row view of the procession of our former governors heading off to federal prisons.  And while we voters and taxpayers receive some small satisfaction from seeing the scoundrels punished for their misdeeds, we’re still left holding the IOU’s emanating from their dysfunctional governance. 

A huge future liability for Illinois taxpayers is going to be the unfunded state pension obligations incurred over the past twenty years of fiscal imprudence. Many of our long-term state legislators in addition to the past felon-governors can “take credit” for this disaster.  How bad is it?  Check out this state pension fund rating analysis conducted by Morningstar:    


The most amazing fact is that in the November 2012 elections, Illinois voters just gave a “super-majority” to the party that engineered this train wreck!

You can’t believe everything you read in the paper… December 9, 2011

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Equity Mutual Funds, Federal Income Taxes, Income Taxes, State Income Taxes.
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Many of our readers reside in the Bloomington-Normal, Illinois area and subsequently subscribe to the local newspaper, The Pantagraph.   An article in the December 8, 2011 “Money & Markets” column of the Money section is entitled “December is tax time”——not surprising given the time of year.  However, the authors, AP writers Mark Jewel, and Jenni Sohn might want to double-check their sources as the article contains several inaccurate statements. 

Their article is based on the annual mutual fund practice (required by law) of distributing to shareholders the pro-rata share of realized capital gains that have resulted within the mutual fund portfolio.  The authors suggest that due to poor 2011 equity market returns, “many stock funds won’t have capital gains to pass on.”  They continue with, “Some may even have losses that investors can use to offset gains on other investments.”  While their first statement may eventually prove to be true, there’s no doubt about the second statement—it is incorrect.   Mutual funds do not pass through the pro-rata share of net realized portfolio losses to shareholders.  Rather, residual realized portfolio losses must be “carried forward” by the fund into future years.

The authors later state that capital gains are not a concern for a tax-free municipal bond fund.   This supposition is also incorrect since only municipal bond interest payments (and not capital gains) escape the reach of the tax man.

The moral of the story???  It’s prudent to obtain guidance from a professional in the field.  Jewel and Sohn do provide some good advice in that regard as they suggest that the complexity of the tax laws makes it wise to, “Consider consulting an accountant or other tax advisor about your strategy.”  Perhaps they should heed some of their own advice……………!!!


Honor system no more July 9, 2011

Posted by forwardfinancialplanning1 in Federal Income Taxes, Income Taxes, Investing-General, State Income Taxes.
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The United States has one of the highest income tax compliance rates in the world.  Despite this fact, the IRS is taking measures to increase compliance even more.  The reporting of “cost basis” on the sale of financial securities has traditionally operated as a de facto honor system because there was no reporting  on cost basis required of financial services firms such as broker-dealers and mutual fund companies.  The IRS did require the reporting of the gross proceeds from a security sale, but as mentioned above, had no way of matching this against the unreported acquisition cost.  So, the taxpayer basically provided the cost basis and the subsequent profit/loss and holding period with the IRS having no way, other than an audit, in which to verify the information.

However, this situation is changing.  Starting this year, financial services firms must also report the cost basis of certain securities sales.  In addition, they must also report the security holding period (short or long term) for the capital gain or loss.

This new  reporting requirement applies to individual stock sales in 2011, mutual funds, most ETF’s and dividend reinvestment plans in 2012 and other securities such as bonds and options in 2013.  Thus, investors will need to start doing some tax planning in advance prior to initiating a security sale.   Since investors frequently accumulate securities positions in multiple acquisition lots, the financial service firm handling the transaction will ask which lot is being sold.  So, dig out your records……………………

New IRS Regulation for 2011 November 6, 2010

Posted by forwardfinancialplanning1 in Federal Income Taxes, Income Taxes, State Income Taxes.
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A new IRS regulation goes into effect in 2011 that will require investors to do some tax planning when selling investments in the future.  Starting in 2011, investment firms will be required to report cost basis to the IRS when a client sells a security.    The impact of this requirement is that if the client has multiple lots of the security and is not liquidating the entire position, one of the IRS-approved accounting methods will have to be specified. 

This will most likely not be  too difficult for owners of common stocks as most are accustomed to selecting specific lots to identify cost basis when completing their income taxes.   It may create greater challenges for mutual fund investors, especially if they are reinvesting dividends.  There are several IRS approved methods for determining cost basis on mutual funds. The new reporting requirement will cause investment firms to “need to know” the clients preferred method in order to properly report the cost basis on the sale transaction.

Fortunately, this new requirement will take effect over an extended period of time, allowing investors an elongated learning curve.  Investment firms and brokers will only be required to report cost basis on the sale of securities which were purchased after December 31, 2010.  Clearly, there will need to be improvements to record-keeping systems, but investors should take heed and be aware of the new requirement.

Beware of aggressive tax preparers March 22, 2010

Posted by forwardfinancialplanning1 in Federal Income Taxes, Income Taxes, State Income Taxes.
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As April 15 approaches, many Americans are occupied by the annual income tax return preparation ritual.  Many choose to “farm-out” the task to paid preparers and the airwaves are filled with promotional blurbs.  Some firms market themselves as being able to obtain higher refunds for their clients. Since the IRS code is identical for all preparers, one has to wonder how one firm can claim an advantage in this regard.    Either these firms are comparing themselves to grossly incompetent competitors or are taking some extremely aggressive positions regarding deductions, exemptions, tax credits and adjustments to income. 

In 2011, it will be interesting to see if these promotional tactics continue as the IRS will require tax preparers to register for the first time. Preparers will be assigned a preparer tax identification number (PTIN) and competency tests will be administered.  On-going education will be required and most importantly, ethics rules will apply to all paid tax preparers.

Tax Burden by State September 21, 2009

Posted by forwardfinancialplanning1 in State Income Taxes.
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A useful comparison tool is available on Kiplinger.com.  It provides information on the  tax burden a retiree would encounter in each of the 50 states.  Go to Kiplinger.com/tools/retiree_map to see how your potential retiree haven stacks up.