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* Food for thought…
Natalie Davila, former research director for the Illinois Revenue Department, explains in an article in Tax Facts, a publication of the Taxpayers’ Federation of Illinois: In 2012, 1 in 4 Illinois tax returns claimed a retirement income exemption to avoid paying taxes. Altogether, those exemptions cost the state $2.3 billion — money that could pay down Illinois’ pension debt, or help it catch up on the billions in unpaid bills, or fund those human and other services that are getting squeezed out of the budget by the cost of paying interest and principal on the state’s crushing indebtedness.
While the number of residents filing returns overall has actually declined slightly from 2007 to 2012, the number of people claiming a retirement income exemption has increased by 9 percent. While declared income of all residents grew during that time in the single digits, the value of retirement exemptions grew by 36 percent. In other words, the retirement exemption is eating an ever-increasing chunk of the state budget.
As for the “granny tax,” the amazing fact is that most people claiming the retirement income exemption are younger than 65, according to data Davila obtained from the Revenue Department. Overall, some 60 percent of taxpayers claiming a retirement exemption haven’t even reached “retirement age.” It’s even truer for those whose adjusted gross income exceeded $1 million. About 70 percent of the millionaires who claimed the exemption were actually under 65. Their exemption averaged $241,939.
posted by Rich Miller
Thursday, Aug 6, 15 @ 2:34 pm
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The state needs to get after those who are claiming the exemption illegally! Do not blame those who claim the exemption legally. It is about the only reason the retirees have not moved out of this state!
Comment by Anonymous Thursday, Aug 6, 15 @ 2:44 pm
No surprise here. Most teachers/administrators and state workers have been retiring ASAP in the last 3-4 years. Most of them would be in their mid to late 50’s. Also, police and fire have mandatory retirements at 55.
Comment by The Colossus of Roads Thursday, Aug 6, 15 @ 2:48 pm
It’s good to know I’m not alone…
Comment by nixit71 Thursday, Aug 6, 15 @ 2:49 pm
I have talked with a number of retirees who agree that if they live in the state and use state services they should pay some form of income tax. As someone who hopefully be in this group, I would favor some graduated taxation for retirement income provided it goes directly into the paying for the pensions of future retirees. My fear is that this large pot of money is too enticing for our politicians to not use it for other purposes.
Comment by DoubleD Thursday, Aug 6, 15 @ 2:51 pm
Probably tax free going in, and mostly tax free coming out. Pretty nice gig.
Could there be about ten more years of boomers getting ready to do the same?
Comment by cdog Thursday, Aug 6, 15 @ 2:51 pm
Various tax laws allow for retirement down to age 55.
Comment by Liberty Thursday, Aug 6, 15 @ 2:53 pm
People who are not yet retired may have a legal exemption. I am not retired but inherited an IRA and must take required minimum distributions. Those distributions are exempt from Illinois tax.
I am tired of all of the hypocrites out there who think that public employees should “share the sacrifice” by forfeiting their pensions yet cry foul on any general tax on retirement income. That tax should be on the table.
Comment by anon Thursday, Aug 6, 15 @ 2:54 pm
Not saying there are many abusing this and claiming it illegally but what might not be factored in are all the military retirees, Illinois does not tax military retirement pay and the average age of a military retiree drawing retirement is 42. This might screw up the numbers a little here… Illinois, I could be wrong, but I believe has a fair amount of military retirees.
Comment by Allen D Thursday, Aug 6, 15 @ 2:54 pm
Illinois law exempts ANY type of retirement income (SS, retirement, early withdraw, etc). And you only get the subtraction if it was claimed on the Federal return. It doesn’t automatically mean they are illegally evading tax if they’re under 65.
Comment by MAD MAX Thursday, Aug 6, 15 @ 2:57 pm
“Leaving Your Job After Age 55
If you are at least 55 years old when you leave your job, you will not have to pay an early distribution tax on any distribution you receive from your former employer’s retirement plan. (You will have to pay income tax on it, however.)
This exception applies only to distributions you receive after you have separated from service, or terminated your employment with the company that sponsors the plan. You don’t have to retire permanently. You can go to work for another employer, or even return to work for the same employer at a later date. But you cannot receive a distribution from your employer’s retirement plan while you are still employed with the company if you want to use the age 55 exception to the early distribution tax.”
Small business:
An employee stock ownership plan, or ESOP, is a type of stock bonus plan which may have some features of a more traditional pension plan. ESOPs are designed to be funded primarily or even exclusively with employer stock. An ESOP can allow cash distributions, however, as long as the employee has the right to demand that benefits be paid in employer stock.
Distributions of dividends from employer stock held inside an ESOP are not subject to the early distribution tax, no matter when you receive the dividend.”
Comment by Liberty Thursday, Aug 6, 15 @ 2:57 pm
This seems to be some low-hanging fruit that should be part of any final budget deal.
Comment by phocion Thursday, Aug 6, 15 @ 2:58 pm
@ anon
I agree that all retirement pay received should be on the table for tax.
Comment by Allen D Thursday, Aug 6, 15 @ 2:59 pm
This makes sense because of the large baby boomer generation retirements. It also makes sense to tax retirement income with perhaps a personal exemption for those over sixty five of perhaps $60-70k. No one like taxes. But those in the retirement ages will likely use many state services and should help pay for those services instead of pushing the whole burden off on the younger generation.
Comment by A Jack Thursday, Aug 6, 15 @ 3:00 pm
Only seems fair that we extend the Income Tax to pensions…. Let’s start with these undisputed facts. First, the failure to properly fund public pensions at the State and local level over the past 50+ years “freed-up” money for current expenditures in those years, thus keeping taxes (relatively) low. Back when the pension funds were being shorted, the “workers” (from both the public AND the private sectors) most certainly received the benefits of additional spending on schools, prisons, public aid, etc. Each day,more and more of yesterday’s workers are retiring. If we continue the exemption of retirement income from the State income tax, it is only the next generation of workers who will be asked to make sacrifices as the State and municipalities strugggle to find the money to fund the public pensions which were not properly funded as the pensions were earned (See In Re Pension Litigation). If we change the law now and tax retirees pensions, at least the people who received the benefits from the government shorting its employees pensions are going to help make up tomorrow’s shortfalls. If we continue the exemption, we are fueling the growing cacophony that “baby-boomers” are nothing but “takers” who want the next generation to pay their bills. The finer points of whether to exempt small(er) pensions from the tax should not overshadow the need to start taxing all pension income, public and private, now. LNM
Comment by Lurk No More Thursday, Aug 6, 15 @ 3:01 pm
You don’t have to have a degree in economics to know that the demographics make it obvious that exempting retirement income from taxation is a policy that will be ruinous to Illinois over the next decade or two. Irresponsible tax policies are a hallmark of Illinois government, it seems.
Comment by Skirmisher Thursday, Aug 6, 15 @ 3:02 pm
Police and fire do not have to retire at 55.There be isolated local law,but certainly not a legal state requirement. The federal requirement is 57
Comment by Ed Thursday, Aug 6, 15 @ 3:03 pm
Go ahead tax the retirees. They can pay their sales tax dollars in Florida. Come to Mira Largo love to have your money here!
Comment by DonaldTrump Thursday, Aug 6, 15 @ 3:03 pm
I would think the State could increase deductions/credits for seniors in order to not create a burden on seniors who are on a very limited income.
Comment by Chicago Guy Thursday, Aug 6, 15 @ 3:04 pm
So limiting the retirement exemption to people over age 65 would yield approximately $1.38 Billion per year. Even if you are afraid to tax granny, this looks like a no-brainer.
Comment by SAP Thursday, Aug 6, 15 @ 3:09 pm
Maybe a stupid question, but how do we define retirement?
Comment by Ahoy! Thursday, Aug 6, 15 @ 3:09 pm
We tax everything else in Illinois (income, sales, property, etc…), we might as well start to tax retirement income. Though it will cause many to finally retire to Florida or Arizona, but it will cut the costs at the Dept of Aging.
Comment by Dudeman Thursday, Aug 6, 15 @ 3:10 pm
For better or worse, the State dumped up to 11,000 young retirees on the exemption rolls with the 2002 ERI. Admittedly, not all the 11,000 were as young as age 50 … and none of them get million dollar pensions. But a lot of them were in their early and mid-50’s. In 2012 (the study), the youngest of those 2002 ERI retirees were only 60 years old.
While I don’t dispute the facts, there may be another anomaly somewhat distorting the data.
In the depths of the 2007ish recession, a lot of people who could do so took retirement after they were laid off, couldn’t find another job, and their unemployment benefits ran out in 2009 / 2010. That brought another bunch of early 60’s retirees who would show up in the 2012 data.
Finally, as the article points out but somewhat glosses over, there is the whole inherited IRA issue with it’s Required Minimum Distribution. The baby boomers’ parents have / are dying off and leaving IRA’s behind that the under 65 crowd has to take RMD’s from.
Now most of what I cite above are relatively modest amounts, anywhere from a few hundred to a thousand or two a year in RMD, pensions up to about $70,000 annually (if you had a good government one), and for the 62 year olds, Social Security from a few thousand to a max of about $24,000 annually for a top earner.
None of these are the millionaires identified, but they are a good portion of the state population … and appear to be about 25% based on the article.
Comment by RNUG Thursday, Aug 6, 15 @ 3:12 pm
Some comments here carry an implicit assumption that the “retirement income” which is the subject of Ms. Davila’s report is all due to the early retirement age established for public employees. This is not a fair assumption, at all. Every person claiming their Social Security at age 62, no matter where they worked, would show up in the “under 65″ exemption amount. LNM
Comment by Lurk no more Thursday, Aug 6, 15 @ 3:12 pm
From a policy standpoint, sure, the income tax should be as broadly based as possible, and there is no reason to exempt retirement income. However, retirees (particularly the “millionaires”) are much more mobile, so you risk losing the economic benefit of their spending and sales taxes, and the property taxes they pay (they may use state ’services’ but probably few of them have kids in school). If state retirees don’t want a cut in their benefits - I suspect other retirees don’t want an (effective 3.75% or higher whatever the tax rate ends up) cut either.
Comment by Put the fun in unfunded Thursday, Aug 6, 15 @ 3:13 pm
It’s only going to get worse as the Baby Boomer generation exits the workforce entirely.
Retirement income will never be taxed in this State as noone who actually wants to be reelected could possibly get behind such a bill.
As it is, a lot of people claiming the exemption don’t even live in Illinois for most of the year and are simply claiming Illinois as their domicile to get the exemption.
Comment by ihpsdm Thursday, Aug 6, 15 @ 3:14 pm
===The state needs to get after those who are claiming the exemption illegally! Do not blame those who claim the exemption legally. It is about the only reason the retirees have not moved out of this state!===
This is something written by someone who doesn’t really understand the situation.
Those folks are legally entitled to the subtraction for retirement income and the retirement income is classified as retirement income by the state and federal government.
There’s not really a lot of room for abuse except for people who are claiming retirement income that are not actually receiving retirement income, which will eventually be picked up because the federal government shares information with the states about taxes.
I’ve said this before here, but the retirement income tax subtraction is basically folks running out on the bill for the services they received over the last several decades.
Comment by Anon Thursday, Aug 6, 15 @ 3:14 pm
The exemption is for Lines 15b, 16b and 20b of the US 1040. Technically, you could have income on one of these lines and not be “retired”.
Comment by ihpsdm Thursday, Aug 6, 15 @ 3:17 pm
From the article: =Or as Davila said: “Poor seniors who have to work pay income tax on their wages. Retirees who do not have to work because they have significant retirement income do not pay income tax.”= This is why it’s OK to tax granny.
Comment by SAP Thursday, Aug 6, 15 @ 3:22 pm
ANON is right. I’m not sure how people can claim this type of income illegally. If they are, it has to be caught at the federal level, as Illinois allows the subtraction if the income is claimed on lines 15b, 16b and 20b. If the Feds are classifying the income as being allowable on one of those lines, the IITA allows the subtraction.
The biggest abuse is with the EIC, but again, it is up the IRS to catch the people illegally claiming the credit.
Comment by ihpsdm Thursday, Aug 6, 15 @ 3:22 pm
Uh, I would like a personal exemption of $70k.
Come on. That’s ridiculous. Doesn’t even make sense.
$2.3 billion in 2012, probably at least that in 2013, 2014, so that would bring the total of revenue that has been left on the table for the last three years to $7 billion. (I suspect 2015 tax year would bring that total to over $10b, and would include a decrease in regular tax revenue due to the demographic shift.)
I am sure the retirees, who I know and love, did their best to stimulate the Illinois economy with their windfalls. A big capital project might do more for the Illinois economy. /s
The revenue package that is needed is not that damaging– granny tax, progressive tax rates including millionaire tax, etc.
Or, we could continue the “hair on fire” approach. Let’s just quit collecting anything and everyone’s on their own. /s
Comment by cdog Thursday, Aug 6, 15 @ 3:37 pm
Of course IL should tax retirement income. It should also tax food. It chooses to do neither, despite its problems.
The idea of someone “being retired” is irrelevant, it is the sources of income that determine whether it is included in taxable income, not the work status of the recipient. If you claim Social at 62 or start an IRA distribution at 59.5 but keep working, the Social or IRA is not taxed because it is Social or IRA, nothing to do with whether YOU are “retired.”
That’s the law. There is no hint of illegality in any of this, but the State continues to indulge itself in politically expedient but very bad financial policy.
Comment by Harry Thursday, Aug 6, 15 @ 3:37 pm
btb, the fact that the source of the income determines its taxability leaves little room for fraud or illegality. Some people will always look for an edge, but there is no reason to believe there is significant abuse, here.
Comment by Harry Thursday, Aug 6, 15 @ 3:40 pm
Wow, that exemption is even more lucrative than I had even imagined. Income is income, regardless of source and should be taxed accordingly. If the income tax base is broadened by including retirement income, then the personal exemption should be increased to lessen the burden on low income individuals.
Comment by Just askin' Thursday, Aug 6, 15 @ 3:41 pm
Stop trying to stick long-standing citizens (retirees) with new taxes while giving away health care, in-state tuition and other taxpayer benefits to persons who are not in this State legally. Not to mention corporate welfare as well……
Comment by No Raise Thursday, Aug 6, 15 @ 3:43 pm
You need some sort of threshold, like $30K-$50K so that you don’t hurt those barely getting by.
Question: Since the pensions generated from the state public pension funds originate in Illinois, wouldn’t pensioners have to pay Illinois state income tax to Illinois regardless of where they live? I know that even though I’m a legal Arizona resident, income I get from trusts originating in Illinois are subject to Illinois income tax.
Comment by Arizona Bob Thursday, Aug 6, 15 @ 3:46 pm
Any bill put forward to tax retirement income better include a millionaire tax also
Comment by Pacman Thursday, Aug 6, 15 @ 3:49 pm
A thoughtful piece. Read the entire piece at iltaxwatch.org. This is income that the IRS and most other states tax. Perhaps it needs to be phased in over several years out of fairness to current retirees and perhaps the first $25 k or so should not be taxed, to be fair to low income folks.
Comment by Taxguy Thursday, Aug 6, 15 @ 3:52 pm
===- Ed - Thursday, Aug 6, 15 @ 3:03 pm:
Police and fire do not have to retire at 55.There be isolated local law,but certainly not a legal state requirement. The federal requirement is 57===
The Illinois State Police has a mandatory retirement age of 60.
Comment by Trooper Thursday, Aug 6, 15 @ 4:00 pm
You can rationalize this one until the cows come home. The amount of retirement income not being taxed among people not of retirement age is a big old lump of coal in the punch bowl. That, is a problem.
Comment by A guy Thursday, Aug 6, 15 @ 4:04 pm
As I have been saying for years - it is only right and fair for the Boomers to pay their fair share. I wouldn’t tax retirement incomes under the Federal poverty rate - but I would think it is fine for retirees to pay too.
As to those thinking that this will cause Illinoisans to leave Illinois - what is the matter with you? If I move to Podunk, my retirement income is still taxable. It doesn’t matter where you live.
Comment by VanillaMan Thursday, Aug 6, 15 @ 4:04 pm
Tax ‘em. It’s their policies and electoral decisions that got us here (including boomers). I figure by the time I can retire, the tax will already be implemented, so we might as well do it now and make those who got us here pay their dues…lord knows I will have to.
Comment by Phenomynous Thursday, Aug 6, 15 @ 4:07 pm
AZ Bob federal law P.I. 104-95 signed into law in 1996 prohibits source tax on retirement income including pensions.
Comment by Pacman Thursday, Aug 6, 15 @ 4:21 pm
Vanilla Man, Retirement income, such as a pension from Illinois, can not be taxed by Illinois, if a person is a resident of another state. This is federal law. Florida has no state income tax, so Illinois is not going to get my retirement income! If it taxes retirement income, I will move from Illinois!
Comment by Anonymous Thursday, Aug 6, 15 @ 4:35 pm
=If it taxes retirement income, I will move from Illinois!==
Done throwing your temper tantrum?
Comment by Demoralized Thursday, Aug 6, 15 @ 4:36 pm
This has to be stopped. It is so unfair to everyone in the state. Another example of the “where’s mine” attitude prevalent through decades of legislative ineptness. Impossible to ever justify.
Comment by Downstate Dem Thursday, Aug 6, 15 @ 4:38 pm
====If it taxes retirement income, I will move from Illinois!===
OK. And a few will. But math works. You’d have to assume an absurdly large % exodus as a result of taxing retirement income to result in less overall revenue for the state from property and sales taxes.
Comment by Robert the Bruce Thursday, Aug 6, 15 @ 4:41 pm
While we’re asking politicians to vote for tax reform, in this case, taxing retirement income, let’s tackle the other elephant in the room where Illinois is an outlier, and put a graduated tax amendment on the ballot in 2016. That will give the politicians who are doing the heavy lifting the greatest flexibility to fashion tax reform that eliminates our structural deficit, and provides the greatest amount of fairness in whatever emerges.
Comment by PublicServant Thursday, Aug 6, 15 @ 4:42 pm
Just another attack that is being used against state employees. Note where the article comes from
By the way the article fails to note that there are some $8.9 billion in lost taxes in Illinois based upon all types of exemptions.
Wonder why? I don’t!
Comment by Federalist Thursday, Aug 6, 15 @ 4:49 pm
Demoralized, No temper tantrum, just a fact!
Comment by Anonymous Thursday, Aug 6, 15 @ 4:49 pm
@Robert the Bruce - Thursday, Aug 6, 15 @ 4:41 pm:
====If it taxes retirement income, I will move from Illinois!===
OK. And a few will. But math works. You’d have to assume an absurdly large % exodus as a result of taxing retirement income to result in less overall revenue for the state from property and sales taxes.
Some of us pay state income taxes as well. I typically have paid around $4,000 a year when the tax was 5%. I also pay over $11,700 in personal property taxes each year.
What do you pay?
Comment by Federalist Thursday, Aug 6, 15 @ 4:55 pm
Most retirees will not be opposed to paying a fair share of taxes for the services and benefits that all citizens need and enjoy. Helping the next generation is everyone’s responsibility.
The reforms that are needed in Illinois:
1. A progressive state income tax that includes retirement income.
2. An end to corporate welfare.
Comment by Enviro Thursday, Aug 6, 15 @ 4:58 pm
Look,retired people paid taxes while they worked.
They paid into pension funds, Ira’s and FICA. It is the State that did not pay into the pension
plans. It is past governors and elected officials who thought they could put off paying the State’s part. Illinois tax payers and state works should not have to pay twice. Some elected officials in Springfield and Washington
have no respect for workers. They want workers to work until they die and they can use the earned benefits however they want!
Comment by nancy Thursday, Aug 6, 15 @ 5:00 pm
Another source of distortion are those over 59 converting a regular IRA to a Roth IRA, often a big lump that shows as a retirement distribution.
Comment by anon. Thursday, Aug 6, 15 @ 5:00 pm
Career military can draw retirement as early as age 37. We don’t hear too many people who begrudge their early pension for their service…but it does go on an awful long time in IL without being taxed.
Comment by Six Degrees of Separation Thursday, Aug 6, 15 @ 5:04 pm
It depends on the level you set. If an exemption is there for the first 50k or so those in the $25-75k, which is most pensioners, will stay. If it’s at the poverty level they will probably take there dollars elsewhere. The millionaires will simply find a loophole somewhere to avoid the tax altogether or to pay at a lower rate than they should. It’s how the system operates.
Comment by Outta dodge Thursday, Aug 6, 15 @ 5:09 pm
If most retirees would not be opposed to paying..(state)taxes, then why aren’t they doing so? This issue comes up every year, like “corporate tax loopholes.” Never goes anywhere. Clearly, politicians are scared of it-really scared.
It’s possible, even probable, that our esteemed legislators and the guv will, under extreme fiscal pressure, raise the income tax back to a little under what it was in Jan and maybe, maybe throw in a sales tax on a couple of services. But that is the absolute limit. Why do you think they are doing all this posturing. It’s not because they are trying to reform the state tax system. They’re just scared they’ll lose (in the case of legislators) their lifetime government jobs.
Comment by Cassandra Thursday, Aug 6, 15 @ 5:13 pm
==They’re just scared they’ll lose (in the case of legislators) their lifetime government jobs.==
Yes, Cassandra you are correct! This is exactly why the Democrats want the Republicans and the governor to share in the ownership of any state income tax increase including a tax on retirement income.
Comment by Enviro Thursday, Aug 6, 15 @ 5:17 pm
To implement a progressive tax/millionaire tax would require a change to the constitution.
I would like to sign a petition to in support of that change. Does anyone know how I could do that?
Comment by cdog Thursday, Aug 6, 15 @ 5:22 pm
As a private sector worker, I have the following deductions that retirees do not: 7.65% to SS/Medicare, 3.75% state income tax, and 10% to my 401k. In order for my take home pay to equal that of a retiree, I have to gross 25% more in salary than a retiree takes out in retirement income.
There seems to be a lot of concern over, for example, the $40K retiree having to pay state income tax. Yet the working stiff has to make $50K just to equal that of the retiree. The $40K worker is even worse off. I hear little concern for the $40K worker paying state income taxes, yet suggest his retiree equal pays, all of a sudden the retiree is packing up and leaving the state?! He still comes out way ahead than his working equivalent.
I would wager that the 3% AAI the $40K public sector retirees have gotten over the years has been greater than the raises his private sector equivalent has gotten since the recession. Yet no qualms to raise the worker bee’s taxes while continuing to keep retirees untaxed. Not picking on public sector hear, mind you, but just an example to show how the retiree’s financial situation isn’t as dire as you might think.
Comment by nixit71 Thursday, Aug 6, 15 @ 5:41 pm
Why is this not being promoted as come to Illinois we love seniors. Go ahead and tax me I got all day to vote
Comment by Anonymous Thursday, Aug 6, 15 @ 5:44 pm
== I would like to sign a petition to in support of that change. Does anyone know how I could do that? ==
Any one can start a petition; just do it. But it’s just going to be a non-binding public expression of opinion.
If you mean how do you start the process of a Constitutional Amendment in Illinois to change taxes, that is not an allowable citizen’s initiative under the IL Constitution’s rules. You have to get a State Legislator to submit a bill to the General Assembly to modify the state constitution.
Comment by RNUG Thursday, Aug 6, 15 @ 5:44 pm
I would say that one problem with taxing retiree income is the state constitution–if you only want to tax higher-income retirees, however defined, you presumably would have to change the state constitution, which requires a flat tax. So really we’re talking about a constitutional amendment that abolishes the flat tax.
Very unlikely that’s gonna happen.
Comment by Cassandra Thursday, Aug 6, 15 @ 6:16 pm
Impose the tax and I’ll be one establishing residency in Florida.
Comment by Anonymous Thursday, Aug 6, 15 @ 6:22 pm
Everyone’s not going to move to Florida. There are a lot more reasons people stay in place than taxes.
Comment by NoGifts Thursday, Aug 6, 15 @ 6:29 pm
I aint payn no more stinkin taxes - you cut way back on your stinkn spendn.
Comment by A Citizen Thursday, Aug 6, 15 @ 7:34 pm
- Arizona Bob - Thursday, Aug 6, 15 @ 3:46 pm:
I know that even though I’m a legal Arizona resident, income I get from trusts originating in Illinois are subject to Illinois income tax.===============
Wow, AZ Bob is a trust fund enfant terrible? The things you learn on CapFax!
Comment by Lynn S, Thursday, Aug 6, 15 @ 7:38 pm
A threshold on state taxation of retirement income has been discussed by both parties, I believe. For example, taxing retirement income greater than $50,000. That would spare low income retirees on fixed incomes from state tax. Seems to make some sense but haven’t heard GA discussions lately-mainly because they are playing the blame game instead of looking for solutions both parties can live with.
Comment by Soccertease Thursday, Aug 6, 15 @ 7:44 pm
Soccertease-
And you would make this constitutional how?
Comment by Cassandra Thursday, Aug 6, 15 @ 7:55 pm
As long as the rate is the same, you can graduate the levels of taxation and survive constitutionality. So you can exempt retirement income under, say 50,000 as long as what is taxable over that amount is the same rate as everything else. Then those folks who are retired on those mammoth million dollar pensions will pay their fair share as well.
Comment by sideline watcher Thursday, Aug 6, 15 @ 8:04 pm
We tax retirement income less than any other state. That can’t continue. Our state income tax is less than almost the entire rest of the Midwest. And we don’t spend nearly as highly as many states. What do we tax a lot of? Sales taxes. And, in the Chicago suburbs, property taxes. But it still doesn’t add up to even a top-ten finish nationwide for taxes.
We’re not going to get out of this crisis without facts. We got into this fix by demanding Minnesota results from Iowa levels of spending with Mississippi levels of revenue. The level of denial of this imbalance, especially on the right, is simply astonishing.
Comment by Angry Chicagoan Thursday, Aug 6, 15 @ 8:05 pm
Payments from paid up whole life insurance policies can also be retirement income in your 50s, and are not retired.
Some people retire and get pensions and also then work another job upon which they are taxed.
At 59.5 they can draw off ira retirement income while still working.
These stats are reported in the article with a bias
Comment by lost in the weeds Thursday, Aug 6, 15 @ 8:05 pm
401k pensions can collect at 59 years old before everyone blames govt employees
Comment by foster brooks Thursday, Aug 6, 15 @ 8:06 pm
==But it still doesn’t add up to even a top-ten finish nationwide for taxes.==
Illinois ranks as the 7th highest state in overall tax burden, on par with Minnesota. That’s at the current 3.75% and w/o taxing retirement income. So I would say the denial is on both sides of the aisle as we’re already highly taxed yet still over our heads in debt. What makes us so different?
Comment by nixit71 Thursday, Aug 6, 15 @ 8:59 pm
My governor promised not to tax seniors that’s why I voted for him
Comment by Anonymous Thursday, Aug 6, 15 @ 9:21 pm
Illinois’ overall tax structure needs to be looked at and the system changed so that it can better adjust to the economy and provide a sustainable adequate source of revenue. Increasing income taxes every few years as demographics change may not be the best way to tackle the problem. So far that is not working too well since the Illinois income tax was first put in place.
According to this link the taxes in Illinois is middle of road when compared to other states.
http://www.kiplinger.com/tool/retirement/T055-S001-state-by-state-guide-to-taxes-on-retirees/index.php
Comment by lost in the weeds Thursday, Aug 6, 15 @ 9:25 pm
==According to this link the taxes in Illinois is middle of road when compared to other states.==
Middle of the road…for retirees (read the fine print). And that’s without any taxation of retirement income. That just goes to show you how high the overall tax burden is already.
Comment by nixit71 Thursday, Aug 6, 15 @ 9:48 pm
Retirees who don’t want to pay any taxes on their retirement are freeloaders. Period. You might want to means test it, but the current system is ridiculous. I am not yet retired, but like another commenter I received a small IRA when my mother died last year. The money I get each month from that is taxed by the feds but not by the state. Crazy.
Comment by Anon Thursday, Aug 6, 15 @ 10:08 pm
Wow. Just got to my computer for the first time today and saw all this feedback on the article I wrote a few months ago. Thanks for taking the time to give your thoughts. One thing I would like to clarify, retirement income is subtracted from taxable income. It is not technically considered an exemption. Those who are 65 or older can claim an exemption (in addition to a personal exemption that all taxpayers can claim). It is this exemption that allowed me to estimate what percentage of returns had a senior and what percentage did not. As many of you have commented, the issue is that the current law excludes all “retirement income” from taxation irrespective of age. The article is not targeted at government pensions, but rather inequities in taxation that arise in Illinois based on the source of income.
Comment by natalie Thursday, Aug 6, 15 @ 10:14 pm
===The article is not targeted at government pensions, but rather inequities in taxation that arise in Illinois based on the source of income.===
Dr. Davila,
Thank you for the clarification. I think a lot of folks miss that a key component of tax policy analysis is supposed to be in terms of equity.
Why should retirement income be different from any other income?
I think one of the nuances that folks miss about the subtraction is that a lot of elderly who are actually in poverty already start out with an AGI that is zero, or very close to zero because of federal treatment of certain kinds of retirement income and so most of the benefits of the tax subtraction are enjoyed by folks who are retired and squarely in the middle class or higher.
I also suspect very few people have seen an IL-1040 with an AGI over a million dollars paying zero taxes to the State of Illinois because of guaranteed payments to partners on a K-1-P.
Comment by TaxesBuyCivilization Thursday, Aug 6, 15 @ 11:10 pm
Even though it might upset some people, I’ll also note that government employees get a sweet deal on their Deferred Comp plan. You can withdraw it at ANY age without penalty; you have to pay federal tax but not state tax.
For people who move back and forth between the private sector and public, they could show up reporting “retirement income” as young as their 30’s.
So Bruce’s superstars can take the Tier 2 pension, get “extra” payments to make up the difference to Tier 1, and stash those “extra” payments into the Deferred Comp plan. Then those superstars can cash it out state tax free when they are shown the door after Bruce loses the next election or if Bruce fires them.
Comment by RNUG Thursday, Aug 6, 15 @ 11:12 pm
===I’ll also note that government employees get a sweet deal on their Deferred Comp plan===
While true, there’s no match, Illinois government employees are underpaid when compared to their colleagues in other states and folks with comparable skills and education in the private sector, and whether or not they receive a cost of living adjustment is decided by a contract, and folks keep referring to having a salary adjusted because inflation is a thing as a “raise.”
So, yes. Deferred comp is a sweet deal, but it’s not like the average state employee is anywhere near maxing it out.
Comment by TaxesBuyCivilization Thursday, Aug 6, 15 @ 11:57 pm
Anyone who could and would retire to Florida is there already.
People will pay the income tax so they can see their grandkids every weekend.
And because Florida is a hole…today’s forecast for Ft Lauderdale is a high of 93, but it will feel like 107 thanks to the humidity.
Comment by Yellow Dog Democrat Thursday, Aug 6, 15 @ 11:58 pm
===And because Florida is a hole…today’s forecast for Ft Lauderdale is a high of 93, but it will feel like 107 thanks to the humidity.===
While that is true YDD, they have this thing called Air Conditioning…
In addition, when it’s 10 below zero, wind chills of -40, and a foot of snow on the ground, it’s 70 and sunny in Florida, just sayin…
Comment by PublicServant Friday, Aug 7, 15 @ 5:53 am
Additional taxes is not the answer for every problem Illinois has. The state has a spending problem. Tax pension income and retirees will take their dollars elsewhere.
Comment by GunSlinger Friday, Aug 7, 15 @ 7:08 am
Now I know why there are so many Retirees from surrounding states that are my neighbor
Comment by Anonymous Friday, Aug 7, 15 @ 7:43 am
Anonymous - You need to get a handle other than the default. Just helps clear things up a bit. It’s not hard. The computer stores a cookie, and remembers the name you chose. Thanks.
Comment by PublicServant Friday, Aug 7, 15 @ 7:53 am
GunSlinger,
=== Tax pension income and retirees will take their dollars elsewhere.===
Do you have data that shows that? Like a constant stream of elderly moving from Wisconsin and Minnesota to get here so they can get a less than 5% or 3.75% tax preference on their income?
Comment by Anon Friday, Aug 7, 15 @ 9:34 am