Illinois vs. Federal

• The Illinois income tax is calculated using the adjusted gross income from the individual's federal tax return and then making adjustments to that amount to determine the individual's taxable income for Illinois. To get to Illinois taxable income, a series of adjustments is made to federal AGI. Some income that is exempt for federal purposes, such as certain interest and dividends, is added back. Illinois also allows for further deductions for retirement income, income derived from Illinois-approved college savings programs and expenses related to participating in Illinois sponsored programs.
  
  

Short-Term Capital Gains

• When stock is sold less than a year after it is acquired, it is considered a short-term capital event. This is important for calculating the applied tax rate to any recognized gain. If the taxpayer has a net capital gain, or the amount that long-term capital gain exceeds any long-term capital losses retained from prior years and current year short-term capital losses, that amount may be taxed at a lower tax rate than ordinary income is taxed. The highest tax rate applied to net capital gain is current 15 percent. Short-term capital gains are taxed as ordinary income, and the applicable personal tax rate for that type of income is applied. This tax rate can be as high as 35 percent.
  
  

Definition of Early Withdrawal

• An individual retirement account is a type of retirement savings plan that allows you to defer recognizing any gains from the selling of securities for tax purposes until after the funds are withdrawn from the plan. In a traditional IRA, you may be able to deduct some or all of your contributions to the plan from your taxable income the year you make the contribution. If you withdraw the funds from the sale of securities contained within the plan prior to the retirement age, it is considered early withdrawal. The retirement age is 59 1/2 years.
  
  

Penalties for Early Withdrawal

• If you early withdraw on an IRA, you are assessed a penalty of an additional 10 percent on anything you withdrew. That penalty will be waived if you withdrew the funds to pursue higher education or to purchase a first home. This penalty is listed on Line 30 of federal Form 1040 and is included in Federal AGI. This increases Illinois taxable income. Regardless of whether the penalty is assessed, you will be responsible to pay taxes on all amounts withdrawn that you have yet to pay tax on. Therefore, all contributions that were deducted from taxable income when made and all deferred tax gains will be taxable when withdrawn from the IRA.