Even as Illinois legislators near the end of their term in Springfield, they must face the budgetary realities of the state, which include a $130 billion pension gap, outstanding bills totaling $6.5 billion, and credit ratings that are still just above junk-bond level. An outlier in the Midwestern region since it can’t seem to manage its money while other states prosper. Members of both parties have long complained about the stark differences in their tax systems, but little has changed.
This is the latest proposal to align the state’s revenues with those of its neighboring states, and it would represent a significant shift in the state’s finances. Finally, he wants to modify the state constitution to allow a graduated income tax instead of the mandatory flat tax. After years of non-serious discussion of the matter, If that were to happen, Illinois’ tax structure would be more in line with that of neighboring states.
However, our neighbors impose two additional levies, both of which have been brought up repeatedly and which yet seem too noxious to discuss.
It is common knowledge that all of Illinois’ neighbors tax retirement income in some way (as does the federal government). Illinois is one of just three states that does not tax public and private pensions, 401(k) withdrawals, annuities, Social Security payments, or IRA withdrawals, out of the 41 states that levy an income tax. In the event that it did, a new research released by the nonpartisan Chicago-based Civic Federation last week proposed that Illinois implement a tax on retirement income, which the organization forecasts could generate over $2.5 billion in revenue in 2015.
According to Laurence Msall, president of the Civic Federation, their offer isn’t a stand-alone proposition “in the abstract,” but rather one that must be implemented with a strong budget in place.
When asked if he thought anyone wanted to add new taxes, he said, “No one.” In addition, he noted that the decades-old idea of exempting retirement income from taxation seemed to be out of date. Are folks staying in Illinois because they don’t have to pay taxes on their retirement income? This was the statement of Msall. “The Census tracts appear to indicate that Illinois is losing residents.”
Census data shows that in the last four years, the state has lost 88,000 net people, with more than a third of the decline occurring in the past year alone.
A tax on retirement income will push even more retirees out of the state, according to Bob Gallo, AARP Illinois’ state director.
To solve the state’s fiscal problems “is not to rely on one group of individuals, who basically did not create this problem in the first place,” Gallo said, “and who did not plan for this to be coming out of their retirement income and who do not have the opportunity or elasticity in their income to make up the difference,” he said.
In 2015, the AARP conducted a survey of residents over the age of 50 in the state. Almost all of the people polled were against it. When asked in 2013, the Simon Institute at Southern Illinois, 74% of respondents said they were against it, while 60% said they supported a tax on retirement income over $100,000, while only 39% said they supported service taxes.
In 1969, Illinois became the first state to levy an income tax on retirement income. It was only two years later that retirement income was partially exempted from taxes, and then completely exempted in 1972. When the exemption was first implemented, there were concerns about revenue being lost, but turning it back rapidly proved politically unpalatable.
Voters over the age of sixty-five are known for their dependability, making them a crucial constituency to win over. Neither Bruce Rauner nor J.B. Pritzker are receptive to the idea of taxing retirement income, no matter how much money it could bring in.
There are 14 service categories that Wisconsin taxes, and the Civic Federation’s recent research recommends that Illinois increase its sales tax to those areas as well. Only a small number of services are currently taxed in Illinois, but 12 out of 17 are deemed utilities, and hence are charged under various regulations. Only Indiana, of the five states that border Illinois, does not now impose a service tax.
Jason Stein, research director for the nonpartisan Wisconsin Policy Forum, said he understands that introducing additional taxes on services is challenging, but once the sales tax is in place, “14 cents on a latte” tends to “flunder the surface.”
According to Stein, “If you ask a homeowner what their property taxes were last year, they’ll probably be able to tell you.” “Unless they’re keeping count, they wouldn’t be able to tell you how much they paid in sales taxes.”
Taxing services is a way to reflect the changing character of the economy, which is spending more on services and less on products, than it did in the past. It has long been recommended by the neutral Tax Foundation that governments widen their tax bases by expanding sales taxes to include services.
It wasn’t long ago that leaders in the Illinois Senate were considering taxing some services such as laundry and dry-cleaning and pest control, as well as security services, tattoos, and piercings, in an effort to overcome a two-year legislative stalemate in which the state had no budget. However, the “Grand Bargain” broke apart because the services were omitted from the pact in the middle of discussions.
When Rauner ran for governor the first time in 2014, he was open to taxing “non-necessity” services including charter flights, interior design, and marina towing. Since Democrats and some Republicans in his own party pushed through a tax increase to end the budget deadlock, Rauner has soured on any upward tax tweak.
While this is going on, a Pritzker spokesman claimed that any time the candidate mentions opposing “regressive” taxes, an increased sales tax on services is listed as an option.
Are pensions and annuities taxable in Illinois?
It is totally tax-free in the Prairie State to receive private pension income from a qualifying employee benefit plan. Payments from the government or military pensions are also exempt from taxation.
If you’re thinking about setting up a 401(k) or an IRA, Illinois is a great place to do it. If your 401(k) is a qualified employee benefit plan, then your distributions are tax-free. Neither are withdrawals from an IRA subject to taxation.
Is income from an annuity taxable?
Annuities are tax-deferred since they are paid out over a long period of time. Ordinary income taxes apply to annuity withdrawals and distributions in lump sum. As a result, they are not eligible for the capital gains exemption.
How much tax do you pay on annuity income?
In addition to regular income tax, a 10% IRS penalty and contractual withdrawal charges, withdrawals from variable annuities may be subject to ordinary income tax.
Is annuity income considered earned income?
The Earned Income Tax Credit can only be claimed if you have earned money. When you file your taxes, you must include in your taxable gross income all of the income you received as a result of your work for the tax year in question. There are many examples of earned income, such as wages, salaries, tips, and other taxable payments for employees. Net profits from self-employment are also included in the term “earned income.” Workers’ compensation, unemployment benefits, worker’s compensation benefits or social security benefits do not count as earned income. Taxpayers who receive battle zone compensation may elect to include it in earned income for tax years beginning in 2003.
What income is not taxed in Illinois?
With regard to retirement income, Illinois ranks towards the bottom of the list when it comes to tax policies that favor retirees. However, it’s the only Midwestern state that totally exempts 401(k), IRA, and pension income from tax. To be exempt from paying taxes, pension and 401(k) income must come from a qualifying employee benefit plan.
Benefits from Social Security: The Prairie State also does not tax benefits from Social Security.
The estate tax in Illinois is imposed on estates with a value above $4,000,000.
At what age is Social Security no longer taxed?
It is possible to get full Social Security retirement payments tax-free at the age of 65 to 67, depending on the year of your birth. Taxes may be levied on a portion of your benefits if you’re still in the workforce. Earnings and half of your Social Security benefits are tallied by the Internal Revenue Service. Your benefits will be taxed if the total exceeds the income restrictions set by the Internal Revenue Service.
How can I avoid paying taxes on annuities?
Taxes can be reduced by putting money into a nonqualified deferred annuity. Nonqualified and qualified annuity interest is not taxed until it is withdrawn from the annuity.
How do I report an annuity on my taxes?
Forms 1040, 1040-SR, and 1040-NR are commonly used to report annuity distributions. Only if federal income tax is withheld and an amount is listed in Box 4 of your 1099-R are you required to attach Copy B to your federal income tax return.
How are withdrawals from an annuity taxed?
- Nonqualified variable annuities don’t allow you to deduct your donations from your taxes, but your money will grow tax-free.
- When you begin getting regular payments from the annuity, you will be taxed on that money as ordinary income.
- In most circumstances, if you withdraw money before the age of 591/2, you’ll be hit with a 10% early withdrawal penalty.
What are disadvantages of annuities?
Purchasing an annuity plan entails placing a high degree of reliance on the financial stability of the insurance provider. Essentially, you’re placing your money on the company’s survival; this is especially worrisome if your annuity plan is for a long time. For example, bears and Lehman Brothers were once formidable institutions that fell victim to poor management and hazardous business practices, as shown by their troubles and demise. There’s no way to be sure that your annuity plan won’t be canceled if another company goes out of business.
It appears that you are spending a lot for annuity products in the aim of reducing risk and securing a steady income. It’s important to remember, though, that nothing in life is free. When interest rates rise or the stock market rises, you can’t take advantage of improved investing opportunities because your money is locked up in a long-term investment plan with inadequate liquidity. Spending the majority of your retirement savings on an annuity is simply not worth it.
When it comes to taxes, annuities may appear to be an advantageous option at first. However, the tax deferral isn’t as advantageous as you might expect from an investing advisor.
When it comes to taxes, annuities employ the Last-in-First-Out technique. In the end, this means that your profits will be subject to taxation at your marginal tax rate.
According to Bankrate, the income tax brackets for 2014 are listed below. Ordinary tax payers must pay the tax rate mentioned below for their normal income.
Does annuity count as income for social security?
Social Security only covers your salaries and self-employment net income, not other sources of income. You are insured by Social Security if you have money deducted from your paychecks for “Social Security” or “FICA.” In other words, you’re contributing to the Social Security system, which in turn ensures that you’ll be covered in the event of death, disability, or old age.
Social Security does not consider pensions, annuities, and interest and dividends from savings and investments to be earnings. No Social Security taxes are due unless you owe money to the IRS.
When should you cash out an annuity?
Wait until you’re at least 59 1/2 to begin taking money out of your IRA, and then put up a methodical withdrawal plan. Exactly what is the “free annuity withdrawal” provision?” You may be able to withdraw up to 10% of your policy’s value prior to the conclusion of the surrender term with some insurance firms.
