Investment Coordination for Chicago Owners and High-Income Households

No. The Reed Corporation is a certified public accounting and tax firm, and that license sets the boundary of the work. We are not a registered investment adviser. We do not sell securities, we do not take custody of client money, we do not pick the funds or the stocks you hold, and we do not run portfolios for a fee. Anyone shopping for investment management Chicago services in the advisory sense, meaning a professional who holds discretion over an account and places trades, needs a registered adviser or a broker dealer for that role. Our chair at the table is the tax chair. We read what your portfolio did during the year and report it correctly. We also plan around the trades your own adviser intends to make, so the tax result is not something you discover in April after nothing can be changed.

Here is the work we actually perform for Chicago households that hold taxable accounts. We rebuild and maintain cost basis across brokerage statements, old account transfers, gifted shares, and inherited lots. We prepare the capital gain and loss reporting that flows onto Form 8949 and Schedule D, and we time recognition around your federal bracket and the Illinois flat rate of about 4.95 percent. Illinois gives no preferential rate for long term gains, so a Chicago seller pays the same state rate on a twenty year holding that he pays on a paycheck. We read Publication 550 against your statements so that dividend character and holding periods land where they belong.

The arithmetic makes the point better than any description. Suppose a client on the North Side holds a fund position worth 400,000 dollars against a basis of 150,000 dollars, so the built in gain is 250,000 dollars. Her adviser decides to sell the whole position and rebalance the account. In a year when her income already sits high, that gain can carry a 20 percent federal rate plus the 3.8 percent Net Investment Income Tax plus the 4.95 percent Illinois rate, which comes to about 71,875 dollars. Move the same sale into a year when a business loss pulls her income down, pair it with 60,000 dollars of losses already sitting unharvested in the same account, and the combined bill falls by roughly 17,250 dollars. We did not select the fund. We picked the calendar and the lots.

The mistake we see most often is a household that assumes the brokerage already has basis right. Basis is frequently wrong on shares moved between firms, on gifted stock, on positions built through decades of dividend reinvestment, and on anything inherited from a parent. Understated basis means paying tax twice on the same dollars. Overstated basis means an underpayment and a notice a year or two later. Nobody at the custodian is checking that figure against your family history, and the custodian is not required to. When an account moves to a new firm, transferred lots often arrive flagged as noncovered, which means the broker reports the sale proceeds and leaves the basis box empty. We keep a running basis schedule so the number is ready before a sale happens rather than reconstructed under pressure the following spring.

Our tax strategy consulting group builds the annual projection and our individual tax return team files the result. Your adviser keeps the portfolio and the trading authority, which is exactly where they belong. We keep the tax record, the basis file, and the projections that sit behind both of those things. Reporting duties on custodians and on taxpayers have grown in nearly every year of the past decade, and nothing in the current rulemaking suggests that trend is about to reverse. A Chicago household that starts a clean basis file this year will spend far less time defending numbers in the years ahead, and far less money paying someone to reconstruct them.

Coordination means a defined flow of information running in both directions, and it has to start well before December. We ask your adviser for realized gain and loss reports, for projected mutual fund capital gain distributions, and for a list of positions still inside the one year holding window. We send back a projected taxable income figure, the bracket you are sitting in, and the room left before the next threshold. Your adviser then makes the investment decision, because that decision belongs to a licensed professional in that field. To be plain about the line, none of this amounts to investment management Chicago service delivery, because trading authority stays with your adviser and the account stays titled in your name. We supply the tax math that makes a sound investment decision cheaper after tax. We also flag any position where a sale would break a holding period by a matter of days, since the gap between the short term rate and the long term rate on one trade can run above ten points.

The year end packet arrives as a stack of forms, and each one carries a different rule. Form 1099-DIV splits ordinary dividends from qualified dividends and reports capital gain distributions that you owe tax on even if you never sold a share. Form 1099-INT reports taxable interest and, on a separate line, interest from federal obligations, which Illinois subtracts from the state base. Interest and dividends above 1,500 dollars run through Schedule B. Illinois taxes interest from municipal bonds issued outside the state even though the federal return leaves that income alone, and the Illinois Department of Revenue publishes the add back rule every filing season.

Here is how the numbers move on that last point. A married couple in Lincoln Park holds 900,000 dollars in a national municipal bond fund yielding about 3 percent, which produces 27,000 dollars of federally exempt interest. Roughly 95 percent of the fund income comes from bonds issued outside Illinois, so about 25,650 dollars gets added back on the state return and taxed at 4.95 percent. That is about 1,270 dollars of Illinois tax the couple never planned for. Shift part of the allocation toward an Illinois specific fund or toward Treasury holdings and the state cost drops close to nothing, because Illinois does not tax interest on federal obligations. The federal answer never changes. Only the Illinois answer changes, and only because someone bothered to look at the state source schedule.

The common mistake is treating the adviser and the accountant as two vendors who never speak. The adviser rebalances in the second week of December without knowing that a Roth conversion is already scheduled. The accountant first learns about 200,000 dollars of realized gain in February, when nothing can be undone. We ask for a standing quarterly report instead, and we read it against Publication 550 so surprises appear while they can still be fixed. A wash sale created by buying the replacement security inside an individual retirement account is permanently disallowed rather than merely deferred, and only a person looking at both accounts at once will ever catch it. The same blind spot hits mutual fund buyers in December. Purchase a fund a week before it declares a large capital gain distribution and you have bought yourself a taxable event on money you only just invested.

Our bookkeeping team keeps the household records that feed these projections, and our tax strategy consulting group runs the December model against them. If you would like to see how that calendar would work for your own accounts, you can Request Private Consultation and we will map the reporting flow before the year closes rather than after. As custodians keep widening what they report to the government, the households holding an organized picture of every account are the ones who file quickly, answer a question once, and move on with the rest of the year.

It is tax work, and the difference is not a technicality. Basis tracking is accounting for what you paid for an asset, adjusted for the events the tax code cares about along the way. It is not investment management Chicago service, because we never decide what you buy, what you keep, or when the account trades. We are reading history and putting it in the right column. A registered adviser looks forward at allocation and risk. We look backward at what actually happened, then forward at what the tax code will do with it. Both jobs matter, and they sit under separate licenses for a reason. Clients sometimes ask us to simply tell them what to buy. We decline, and we explain why. A certified public accountant who starts recommending securities has stepped outside the license and outside the insurance that stands behind it.

Basis rarely equals purchase price by the time a position is sold. Reinvested dividends add to basis, because you already paid tax on that income once. Return of capital distributions reduce basis instead of creating current income. A loss disallowed by the wash sale rule gets added to the basis of the replacement shares and shows up later. Property inherited from a decedent generally takes a value fixed at the date of death, so decades of appreciation disappear from the taxable gain. Gifted property carries the donor original basis, with a separate rule that limits a loss. Publication 551 walks through each of these adjustments, and Publication 550 covers the investment specific pieces.

A recent pattern shows what the stakes look like. A client inherits 5,000 shares her father bought in 1994 for 12,000 dollars. On his date of death the block is worth 310,000 dollars. She sells two years later for 340,000 dollars. Reported correctly, the taxable gain is 30,000 dollars. Reported off the 1994 purchase price, which is what happens when a preparer copies the old cost from an ancient statement, the gain looks like 328,000 dollars. At a combined federal and Illinois rate near 28.75 percent, that error would have cost her about 85,675 dollars in tax she never owed. The sale itself was reported on Form 8949, in the box reserved for lots where the broker did not furnish basis.

The mistake here is trusting the boxes on the broker statement without reading the code letters. Brokers only track basis on covered securities, which generally means stock acquired after 2010 and mutual fund shares acquired after 2011. Anything older is noncovered, and the reported basis is either blank or unverified. Taxpayers file those lots anyway, sometimes with a zero in the basis column, and hand the government a gain that never existed. Nothing about that is unusual and nothing about it is the fault of the broker. Publication 544 explains how gains and losses on asset sales get characterized once basis is finally settled. We treat a blank basis box as an open question rather than a settled fact, and we go looking for the answer in old confirmations, in probate files, and in the transfer paperwork that arrived with the account.

Our bookkeeping group maintains the running schedules, and our individual tax return team ties them to the filed return each spring, so the record does not live in one person memory. We ask for old confirmations, gift letters, and estate valuations while the people who remember them are still available to ask. Estate appraisals in particular have a way of vanishing about five years after they were prepared. Families that assemble this file during a calm year rather than during an estate settlement save an enormous amount of money and argument. The next generation inherits a documented basis history instead of a shoebox, and that is worth more than most people expect.

The Net Investment Income Tax is a 3.8 percent federal tax under section 1411 of the code, and it applies to the smaller of two figures. The first figure is your net investment income for the year. The second is the amount by which your modified adjusted gross income exceeds a fixed threshold, which is 200,000 dollars for a single filer, 250,000 dollars for a married couple filing jointly, and 125,000 dollars for a married person filing separately. Those thresholds are not indexed for inflation, so every year of wage growth pulls more households into the tax. The charge sits on top of the regular income tax and the capital gain rates, so it is a genuine extra layer rather than a substitute for anything. The computation runs on Form 8960, which is where most surprises get discovered far too late to fix them.

What counts as net investment income is narrower than people assume. Interest, dividends, annuity income, royalties, capital gains, and rents generally count, along with income from a business in which you do not materially participate. Wages do not count. Self employment earnings do not count. Distributions from qualified retirement plans and individual retirement accounts do not count either, though they raise modified adjusted gross income and can therefore drag other income above the threshold. Municipal bond interest that is exempt for regular federal purposes also stays outside the base, which is one of the few places where the federal answer and the Illinois answer move in opposite directions. Material participation can pull a rental or an operating business out of the base entirely, and the tests are set out in Publication 925. Rental results themselves report on Schedule E.

Take a married couple in the West Loop with 210,000 dollars of wages and 120,000 dollars of investment income, giving modified adjusted gross income of 330,000 dollars. The excess over the 250,000 dollar threshold is 80,000 dollars, which is smaller than the 120,000 dollars of investment income, so the tax applies to 80,000 dollars and costs 3,040 dollars. Illinois then takes 4.95 percent of that same investment income, another 5,940 dollars, because the state has no separate rate for portfolio income. If the couple also owns an interest in a partnership, the Illinois Personal Property Replacement Tax of roughly 1.5 percent hits the entity level income before anything reaches their personal return.

The common mistake is discovering all of this at filing time and paying it late. The 3.8 percent tax is part of your total liability, so it belongs in your quarterly payments through Form 1040-ES. A taxpayer whose prior year adjusted gross income exceeded 150,000 dollars generally needs 110 percent of the prior year total to sit inside the safe harbor, a rule explained in Publication 505. Miss it and the underpayment charge is computed on Form 2210. A large December sale with no matching estimate is the single most common cause of an unpleasant April. A fund distribution you never asked for counts exactly the same as a sale you chose to make.

Our tax strategy consulting team runs this projection twice a year, and our individual tax return group carries the result onto the filed forms. We also check whether a large gain can be spread across two calendar years through an installment sale or a partial disposition, because splitting one sale in half sometimes keeps both halves under the threshold. We would rather tell you in October that a sale will add 3,040 dollars of federal tax and 5,940 dollars of Illinois tax than tell you in April that the money has already been spent. Because the section 1411 thresholds stay frozen while incomes rise, more Chicago households cross into this tax every year, and the planning window keeps getting more valuable to the people who use it early.

Illinois is unusual, and the difference is worth real money. The state subtracts qualified retirement income from its tax base, so a pension payment or a withdrawal from an individual retirement account that would be taxed at the ordinary state rate in many other states is generally not taxed at the Illinois level at all. Social Security benefits sit outside the Illinois base as well, which compounds the advantage for a retired household here. The federal tax still applies in full. That single rule changes the order in which a Chicago retiree should pull from accounts, and it changes the value of a Roth conversion done while living here. The Illinois Department of Revenue publishes the subtraction and its limits each year, and the amounts reported to you appear on Form 1099-R.

The planning window most households waste sits between the last paycheck and the first required minimum distribution. In those years taxable income often falls into a low bracket while the traditional retirement balance keeps growing untouched. Converting a measured slice each year fills the low bracket deliberately instead of leaving it empty, and the converted balance then grows without another layer of tax. A conversion is reported as an ordinary distribution followed by a rollover into a Roth account, and the amount is taxed at your ordinary rate in the year of the conversion rather than at capital gain rates. Contribution rules live in Publication 590-A and distribution rules in Publication 590-B, and both matter here because a required distribution cannot itself be converted.

Consider a couple, both 63, who retired last year with 1,200,000 dollars in a traditional account and modest interest income. Converting 90,000 dollars fills the bracket they already occupy and costs roughly 19,800 dollars of federal tax at a 22 percent marginal rate. Illinois generally adds nothing on that conversion because of the retirement subtraction, where the same move made as a New York or California resident would carry a real state cost on top of the federal bill. Repeat it for six years and roughly 540,000 dollars moves to the Roth side at a known rate, which shrinks every later required distribution and shrinks what a surviving spouse would face alone in a single filer bracket. The couple keeps their own adviser throughout, and that adviser decides how the converted balance gets invested once it lands.

Two mistakes show up again and again. The first is paying the conversion tax out of the retirement account itself, which shrinks the balance being converted and, for anyone under 59 and a half, can trigger an early distribution penalty on the withheld amount. Pay it from taxable savings instead. The second is forgetting that a conversion raises modified adjusted gross income even though the conversion itself is not net investment income, so it can push interest and dividends over the threshold and trigger the 3.8 percent charge on Form 8960. Medicare premium surcharges key off income from two years earlier, which catches people who converted without checking. Anyone on a marketplace health plan should run the premium credit math first, because one large conversion year can claw back a subsidy.

Business owners get a second lever. A solo plan or a simplified employee pension can absorb a large share of profit in a strong year, and the contribution limits and timing rules are laid out in Publication 560. Our tax strategy consulting group models the multi year conversion schedule and our bookkeeping team keeps the entity records that set the contribution ceiling. Choosing an account type and a funding amount is tax planning, not investment management Chicago service, and your own adviser still decides how the money inside those accounts is invested. Start the conversion calendar early, because every year spent below the required distribution age is a year you cannot buy back later.