Investment Coordination for High Net Worth Individuals in Chicago

No. The Reed Corporation is a CPA and tax firm, and that boundary belongs at the top of the page rather than buried in a footer. We are not a registered investment adviser. We do not hold discretion over any account and we do not sell securities. We do not manage portfolios and we do not provide investment management services in the advisory sense. Nobody here is going to tell you to buy a municipal bond fund or trim a concentrated position, because that is not our license and not our work. What we provide is investment coordination for high net worth clients in Chicago in the tax meaning of the phrase, which is that we sit beside the decisions your own licensed advisors make and price what those decisions cost you in April.

The split is practical, not cosmetic. Your adviser carries a duty about allocation and risk. They generally do not prepare your return, they rarely see your K-1s, and they almost never know that a Cook County second installment landed in December and drained the account they were about to draw from. We know all of that, because it runs through the books. So the coordination flows in the direction people do not expect. The adviser proposes. We price the tax and hand the number back before the trade rather than after it.

The work itself is basis, timing, character, and reporting. Basis has to be right before a gain can be right, and Publication 551 governs how basis is set at acquisition and adjusted while you hold. Sales land on Form 8949 and carry to Schedule D. Publication 550 describes what investment income is and how each kind behaves. Above certain income levels the 3.8 percent Net Investment Income Tax applies through Form 8960, and that surcharge stacks on the capital gain rate rather than replacing it. Add the Illinois flat rate of about 4.95 percent published by the Illinois Department of Revenue and a Chicago household frequently faces a combined rate that no performance report has ever displayed.

A worked example. A client came in one November holding a position with 480,000 dollars of unrealized gain, and the adviser had proposed selling half before year end for reasons that were sound on the merits. Sold that way, 240,000 dollars of long term gain would have carried roughly 48,000 dollars of federal tax at 20 percent, another 9,120 dollars of Net Investment Income Tax, and about 11,880 dollars of Illinois tax, close to 69,000 dollars in total. Two facts had gone missing. There was 96,000 dollars of unused capital loss carryforward from a 2022 sale that nobody had carried onto the current return, and there was a second lot of the same security held at a different custodian with a far higher basis. Selling the high basis lot first and applying the carryforward brought the taxable gain to about 88,000 dollars and the total tax to roughly 25,000 dollars. The adviser got the exact allocation change he wanted. The tax was about 44,000 dollars smaller. We never picked a security.

The common mistake is treating tax as a report that shows up after the year has closed. By the time the composite 1099 arrives in February, every decision that mattered is already made and the only open question is the size of the bill. If you want the tax question asked before the next trade rather than after it, you can Request Private Consultation and we will start with the basis file. Steady bookkeeping underneath, plus a tax strategy consulting look at the year ahead, moves the tax conversation in front of the decision. Households that make that move stop being surprised in April, and April is where the surprises cost money.

Basis is the number that decides the tax, and it is the number most likely to be wrong. A sale produces gain equal to proceeds minus basis, so an error in basis is an error in tax, dollar for dollar, with no offsetting mercy anywhere else on the return. Publication 551 sets out how basis is established and adjusted, and Publication 550 covers what happens to it during the holding period. Neither document is difficult reading. The difficulty is that a household with six accounts across four custodians has no single place where basis actually lives, and each custodian only knows its own corner of the picture.

People assume the broker settles the question. Brokers report basis to the IRS only for covered securities, which broadly means stock acquired in 2011 or later, mutual fund and dividend reinvestment shares from 2012 or later, and most bonds and options from 2014 or later. Everything older is noncovered. For a noncovered lot the broker may print a number or may print nothing at all, and what it prints is often just whatever the previous custodian passed along during a transfer years ago. The IRS never receives it. You carry the burden of proof. Form 8949 has an adjustment column that exists precisely because the reported figure is so often wrong, and the corrected totals then flow to Schedule D.

Certain categories break almost every time. Inherited property takes a basis equal to fair market value at the date of death, which usually means a large step up that no custodian knows about. Gifted property carries the donor’s basis forward, with a special rule that limits a loss to the value at the date of the gift. Dividend reinvestment quietly creates a new lot every quarter for years. Return of capital distributions reduce basis without anyone announcing it. Wash sales move a disallowed loss into the basis of the replacement shares. Publication 544 walks through dispositions and the character that follows them.

Here is what the error looks like in dollars. A Chicago client inherited 3,000 shares from a parent who died in 2019. The parent had bought them in 1994 at about 11 dollars, roughly 33,000 dollars. At the date of death they traded at 61 dollars, or 183,000 dollars, and that stepped up figure became the client’s basis. The shares moved to a new custodian in 2021 and arrived flagged noncovered with the old 33,000 dollars sitting in the basis field. When the client sold in 2024 at 74 dollars, or 222,000 dollars, the composite statement showed a gain of 189,000 dollars. The real gain was 39,000 dollars. That 150,000 dollar phantom would have carried about 30,000 dollars of federal tax at 20 percent, roughly 5,700 dollars of Net Investment Income Tax, and about 7,425 dollars of Illinois tax at the flat 4.95 percent. Roughly 43,000 dollars of tax on a gain that never occurred. The repair was a date of death valuation and a corrected entry on Form 8949.

The common mistake is waiting until the year of sale to go looking for the number. By then the estate has closed and the executor has moved on. The 2019 pricing becomes a research project billed by the hour, and sometimes the answer is simply gone. Build the basis file while the facts are still cheap. That is the quiet center of investment coordination for high net worth clients in Chicago, and it is why a custodian statement is a starting point rather than an answer. Careful bookkeeping that records the acquisition facts as they happen, feeding individual tax return preparation that already holds the lot detail, turns a February scramble into a lookup. Do it now and every sale for the next twenty years gets easier.

It adds 3.8 percent, it is computed on Form 8960, and it applies to the smaller of two figures. Those figures are net investment income for the year, or the amount by which modified adjusted gross income clears a threshold. The thresholds are 250,000 dollars for a joint return, 200,000 dollars for a single filer, and 125,000 dollars for married filing separately. The detail that catches people is that Congress never indexed those thresholds for inflation. They were written in 2010 and they have not moved since, so every year of wage growth and every year of asset appreciation pulls more households across a line that stands perfectly still.

What counts is broad. Interest, dividends, capital gains, rents, royalties, annuity income, and income from a business you do not materially participate in all sit inside net investment income. Publication 550 describes the categories, interest and ordinary dividends report through Schedule B, and the payers document them on Form 1099-DIV and Form 1099-INT. Rental income arrives through Schedule E. What does not count matters just as much. Wages, self employment earnings, and distributions out of IRAs and qualified plans sit outside the base entirely, though a plan distribution still raises modified adjusted gross income and can therefore drag other income over the threshold.

Participation is where the actual planning lives. Publication 925 sets out the material participation standards, and income from a trade or business you materially participate in is generally outside net investment income. The tests are mechanical rather than judgmental. More than 500 hours in the activity during the year is the common one, and there are alternatives built around performing substantially all of the participation in the activity or clearing 100 hours measured against everyone else involved. That single distinction is worth 3.8 percent on every dollar the business earns, and it turns on hour counts recorded as the year runs. A calendar kept in real time is evidence. A number produced from memory two years later is an assertion.

A worked example. A Chicago couple filed jointly with 640,000 dollars of modified adjusted gross income, including 210,000 dollars of net investment income made of dividends and long term gains, plus net rent from a Wilmette two flat. Income over the threshold was 390,000 dollars and net investment income was 210,000 dollars, so the tax applied to the smaller figure, 3.8 percent of 210,000 dollars, or 7,980 dollars. That rode on top of the 20 percent federal capital gain rate and the Illinois flat 4.95 percent published by the Illinois Department of Revenue. Their adviser had been sitting on a losing position with 90,000 dollars of unrealized loss, held out of stubbornness rather than conviction. Realizing it in December cut net investment income to 120,000 dollars and the surtax to 4,560 dollars, saved 18,000 dollars of federal capital gains tax, and removed about 4,455 dollars of Illinois tax. Roughly 25,875 dollars in total, from a decision the adviser had already been weighing on investment grounds alone. We supplied the tax number. He made the call.

The common mistake is dismissing 3.8 percent as a rounding error. On 210,000 dollars of investment income it is nearly 8,000 dollars a year, every year, and it works against you a little harder each year because the threshold never rises to meet your income. The second mistake is a paperwork one. Hours of participation get reconstructed from memory when someone finally asks, and reconstructed hours persuade nobody. That is the part of investment coordination for high net worth clients in Chicago that looks least like tax work and pays best. A tax strategy consulting review that sets the participation records up front, feeding individual tax return preparation that can support the position on paper, keeps the surtax where it belongs. Thresholds that stand still while your income grows only point one direction, so the planning is worth more every year you keep it running.

Retirement accounts are where the tax rules bite hardest and where the adviser and the accountant most need to be in the same conversation. Publication 590-A covers contributions and Publication 590-B covers distributions, and between those two documents sit most of the mistakes we end up cleaning up. The account is not an allocation question in this context. It is a timing question about when income gets recognized and at what rate, and that is a tax question with a tax answer.

Illinois hands Chicago households an advantage that people from other states rarely believe at first. Illinois does not tax income from qualified retirement plans. Distributions from an IRA, a 401(k), a pension, and Social Security are all subtracted from the flat 4.95 percent base on the state return, and the Illinois Department of Revenue publishes the subtraction rules. The federal tax on a distribution is unchanged, but the state layer is simply gone. That fact changes the arithmetic on a Roth conversion in a way that does not apply in New York or California at all, and it is a genuine reason to run conversions while you are still an Illinois resident.

A worked example. A client at 58, with a strong year and taxable income landing in the 32 percent federal bracket, converted 200,000 dollars from a traditional IRA to a Roth. The federal cost was about 64,000 dollars. The Illinois cost was zero, because the conversion is a distribution from a qualified plan and rides the subtraction, where an equivalent 200,000 dollars of ordinary investment income would have carried about 9,900 dollars of state tax. The conversion also is not net investment income, so Form 8960 ignored it directly. It did raise modified adjusted gross income by 200,000 dollars and pushed a block of the client’s dividends over the surtax threshold, which cost about 3,400 dollars nobody had modeled in advance. Net of everything the conversion still made sense, and it made more sense in Illinois than it would have in almost any state with a graduated rate. The distribution reported on Form 1099-R.

The pro rata rule is the trap underneath all of this. Anyone making a backdoor Roth contribution has to reckon with the fact that the calculation looks at the total balance of every traditional IRA you own on December 31, including SEP and SIMPLE accounts, not just the one the money moved through. A client with a 7,000 dollar nondeductible contribution and 593,000 dollars sitting in a rollover IRA from an old employer does not get a tax free conversion. He gets a conversion that is roughly 99 percent taxable, and he usually finds out about it a year later. Rolling the old balance into a current employer plan first, if that plan accepts rollovers in, empties the denominator and the whole thing works as advertised. Sequence decides the outcome, and sequence is a coordination problem rather than an investment one.

Business owners have another lever worth pulling. Publication 560 covers the plans available to an owner, and a solo 401(k) or a defined benefit plan can absorb far more income than most people expect, which matters enormously in a year with a large realized gain. The common mistake is treating the retirement account as the adviser’s territory and the return as ours, with nobody standing in the middle. Nobody stands in the middle by default. That is the whole job. Current bookkeeping that shows what the year actually looks like by October, plus a tax strategy consulting session before December, is what turns a conversion into a decision instead of an accident. Every year you skip that conversation is a year of bracket space that does not come back.

With your adviser and your attorney, and with whoever administers the trust if there is one. The answer to the second half of the question is continuously rather than in April. April is arithmetic. Every decision that produced the arithmetic happened months earlier, usually in a conversation we were not part of. That is the part of investment coordination for high net worth clients in Chicago that clients underrate, because the deliverable is a phone call rather than a document, and a phone call does not look like work until you price the ones that never happened. A tax return is a transcript of a year that is already over. Nothing in it can be changed by the person typing it.

The calendar drives the rest. Estimated payments are due April 15, June 15, and September 15 of 2026, then January 15 of 2027, and Form 1040-ES is how they get computed. Publication 505 explains the withholding and estimated tax rules underneath. A realized gain in March creates a payment obligation in June, not a problem in April of the following year. The safe harbor is the thing worth knowing. Pay in 110 percent of the prior year total tax if your adjusted gross income was over 150,000 dollars, and the underpayment penalty computed on Form 2210 goes away regardless of how large the current year turns out to be. Illinois runs its own estimated payment schedule against the flat 4.95 percent, and the Illinois Department of Revenue expects the same discipline.

A worked example of what silence costs. A client sold an interest in a building in March of 2024 and realized 900,000 dollars of long term gain. We heard about it the following January. The federal tax ran about 180,000 dollars at 20 percent, the Net Investment Income Tax added roughly 34,200 dollars, and Illinois took about 44,550 dollars at the flat rate. Nothing had been paid in during the year. His prior year tax had been modest, so the 110 percent safe harbor would have covered him completely for about 38,000 dollars of estimated payments spread across the four quarters, and the balance would simply have been due the following April with no penalty attached to it. Instead he paid the whole amount in April plus roughly 9,400 dollars of underpayment interest, and he had to sell a second position in a weak quarter to raise cash for a bill he did not know was coming. One phone call in March would have cost him nothing and saved all of it.

So the rhythm we run is plain. We want a check in after any transaction large enough to move the number, and the threshold for that is lower than most people assume. We want a real projection in October, built on Form 1040 mechanics against actual year to date figures rather than a guess, while there is still a quarter left to act in. We want a December session for loss harvesting and any conversion or charitable timing worth doing. Then the filing in spring becomes a formality, because the answer was already known in the fall. None of that requires us to hold an opinion about your allocation. It requires us to know what happened before it stops being changeable.

The common mistake here is the polite one. Clients do not want to bother the accountant in March over a single trade, so they save it all up and hand over a stack of statements in February. By February we are historians. The entire value of the coordination is that it happens while the facts are still moving, and it costs a phone call. Keep the books current through steady bookkeeping, let individual tax return preparation run off records that were right all year, and the spring stops being an event. Build that habit this year and the next large gain arrives with the tax already computed and the cash already set aside.