There are $6.5 billion in unpaid bills in Illinois, a $130 billion pension gap, and credit ratings barely above junk-bond status despite an income tax boost last summer as Illinois lawmakers enter their final weeks in Springfield. That makes Indiana an anomaly in the Midwest, a state that can’t seem to manage its money while the rest of the region does well. Members of both parties have long criticized the fact that their tax system differs significantly from theirs, yet nothing 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. For the first time in years, he’s pushing to modify the state’s constitution to allow for a graduated income tax rather than the current flat tax. If that were to happen, Illinois’ tax structure would be more in line with that of neighboring states.
Two other forms of taxation that have been brought up repeatedly by our neighbors are still too toxic to contemplate.
All of Illinois’ neighbors impose some kind of tax on retired individuals’ income (as does the federal government). Illinois is one of only three states that does not tax public and private pensions, 401(k) withdrawals, annuities, Social Security payments, and IRA withdrawals, despite the fact that 41 states levy an income tax. Illinois might raise over $2.5 billion in revenue next year if a new report from the nonpartisan Civic Federation of Chicago recommends the state implement a tax on retirement income.
When it comes to making a concrete plan, Laurence Msall, president of the Civic Federation, made it clear that the organization’s idea isn’t something that can be adopted “in the abstract.”
Nobody likes to raise taxes if they don’t have to, he declared. According to him, the idea of exempting retirement income from taxation has been out of date for decades. Are folks in Illinois because they don’t have to pay taxes on their retirement income? Msall said this. “The Census tracts appear to indicate that Illinois is losing residents.”
There have been over 88,000 net population losses in the last four years, with over a third of those occurring in the last year alone, according to census data.
A tax on retirement income, however, will push more retirees out of Illinois, according to the state director of AARP Illinois, Bob Gallo.
We don’t want to solve the state’s financial problems by putting it on the backs of one group of people who didn’t cause the problem in the first place and who didn’t plan for this to come out of their retirement income and don’t have the opportunity or elasticity in their income to make up the difference, said Gallo.
In 2015, the AARP conducted a survey of residents over the age of 50 in the state. The idea was vehemently opposed by the overwhelming majority of voters. Over 70% of respondents to a Southern Illinois University Simon Institute questioned in 2013 rejected a tax on retirement income over $100,000, while just 39% supported a service tax.
Retirement income was included in the state’s first income tax law, passed in 1969. Retirement income was partially exempted in 1970, but was entirely exempted in 1972, just two years later. However, even though there had been warnings that revenue would be lost, serious discussions of switching back became politically undesirable.
Voters in their 60s and 70s are an important demographic to target. Neither Bruce Rauner nor J.B. Pritzker are amenable to the idea of taxing retirement income, no matter how much money it could raise.
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. The Federation of Tax Administrators estimates that 12 of the state’s 17 taxed services are deemed utilities, and so fall under a separate set of laws than the ones currently in effect in Illinois. Only Indiana does not now tax services among the five states that border Illinois.
Wisconsin Policy Forum Research Director Jason Stein says he realizes that imposing new taxes on services is challenging, but once the sales tax is in place, “14 cents on a latte” tends to “flunder under the radar.”
A homeowner, according to Stein, “should be able to tell you exactly how much they spent in property taxes last year.” “Unless they’re keeping count, they wouldn’t know how much they paid in sales taxes.”
Taxing services makes sense because of the shift in consumer spending from commodities to services and goods-delivery services, which is what it used to be like before. According to the Washington, DC-based Tax Foundation, states should consider broadening their tax bases by levying sales taxes on services as well as goods.
As recently as last spring, leaders in the Illinois Senate attempted to broker a deal that would end Illinois’ two-year political stalemate where the state operated without a proper budget by taxing certain services like laundry and dry cleaning, pest control, security services, tattoos and piercings. However, in the middle of the negotiations, the services included in the so-called “Grand Bargain” were slashed, and the deal ultimately fell through.
Rauner was open to taxing “non-necessity” services like charter flights, interior design, and marina towing during his first gubernatorial campaign in 2014. 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.
A spokeswoman for J.B. Pritzker stated that whenever the candidate refers to “regressive” taxes, a larger sales tax on services is part of the conversation.
Are retirement annuities taxable in Illinois?
How to Pay Taxes on a Retirement Income GARS benefits are not subject to state income tax in Illinois, but they are in the federal government’s hands if you get them.
Which states do not tax annuities?
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming are the nine states that do not impose any personal or state taxes. Another nine states, including Alabama, Hawaii, Illinois, Kansas, Louisiana, Mississippi, New York, and Pennsylvania, do not tax CSRS and FERS annuities.
Do you have to pay taxes on an annuity?
- For qualifying annuities, you will be taxed on the entire withdrawal amount. If it’s a non-qualified annuity, you won’t have to pay income taxes on the earnings.
- Over the predicted number of payments, the principal and tax exclusions of your annuity are divided equally.
- If you take money from your annuity before the age of 59 1/2, you will face a 10% early withdrawal penalty.
Are retirement accounts taxed in Illinois?
A qualifying employee benefit plan, such as a 401(K) or an IRA, or a self-employed retirement plan is exempt from Illinois taxation, as is the federally taxed portion of Social Security income.
What income is not taxed in Illinois?
Income from Retirement: Illinois is one of the most tax-unfriendly states in the union for those who are retired. To be sure, it is the only Midwestern state that does not charge taxes on distributions from retirement accounts like 401(k), IRAs, and pensions. To be tax-free, however, pension and 401(k) income must come from a qualified benefit plan for employees.
Benefits from Social Security: The Prairie State also does not tax benefits from Social Security.
The estate tax in Illinois is imposed on estates valued at more than $4 million.
Is Illinois good for retirees?
Illinois is a great state for retirees because of its low taxes! As a result of retiring in Illinois, nearly all of your retirement income is tax-exempt, including Social Security benefits, pension income, and income from retirement savings accounts, such as 401(k)s.
Which states charge a premium tax on annuities?
California, Florida, Maine, Nevada, Puerto Rico, South Dakota, West Virginia, and Wyoming are among the eight states that currently impose a state premium tax on annuity contract deposits made by its customers. The buyer’s place of residence determines whether or not the tax is applicable.
Which state is the most tax-friendly for retirees?
- Income tax rates in the state range from 2.2 percent (on taxable income between $2,000 and $5,000) to 6.6 percent
Thank you, Delaware! You’re the best state for retirees in the country. Delaware is a tax haven for retirees because of its lack of sales tax, cheap property taxes, and lack of death taxes. For starters, if you live in the First State, you’ll have more money in your retirement years since you won’t have to pay any state or municipal sales tax on in-state purchases (Delaware is one of only a handful of states with no sales tax).
As a result, you’ll be able to spend a lot more money on your grandchildren. This couple’s Delaware property tax bill for their $250,000 home is projected at $1,405 per year. Our second fictitious couple’s $350,000 house in the state costs just $1,967. For residences at these prices, the property tax totals are the fifth lowest in the country. As a result, our hypothetical retired couples will be quite content in the state of Washington. Additionally, some Delaware seniors are eligible for a tax credit of up to $400 for school property taxes (you might have to live in the state for 10 years to get it, though).
The absence of estate and inheritance taxes in Delaware means that you can leave more of your money to your grandchildren (or to other family, friends or charities).
In terms of downsides, the only one worth mentioning is that middle-of-the-road income taxes are present. Pension and other retirement income (including dividends, interest, capital gains, IRA and 401(k) distributions and so on) can be excluded by residents 60 years of age and over for a maximum of $12,500. Additionally, Social Security benefits are exempt from this rule. When everything is said and done, income taxes aren’t enough to keep the state from taking the top spot on our ranking of the best states to retire in.
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.
Are Illinois pensions taxed?
In the Prairie State, private pension income from a qualified employee benefit plan is totally tax-exempt. Military and government pensions are exempt from taxation.
On the other hand, Illinois is one of the most tax-friendly states when it comes to the 401(k) and the Individual Retirement Account (IRA). If the 401(k) plan is a qualified employee benefit plan, distributions are tax-free. IRA distributions are also tax-free.
