How Can Income Tax Returns Hurt Your Retirement?

I recently read a Wall Street Journal article titled Income Tax Yo-Yo Hits States. After reading it, I wanted you to know what I learned. Let me tell you folks…it’s a mess out there. Technically we’re out of the recession, but in a real practical sense, we’re not. And you can lay the majority of the blame at the feet of governments.

Last year was the last year for the Bush Tax cuts. Those tax cuts included cuts on long term capital gains. Ok, before you get bored and tune out, listen to what I’m saying. If you buy a stock and keep it for at least a year before selling it, you pay 15%, maybe less, on the gain instead of what your regular tax bracket is. Since most high income earners are in a much higher tax bracket, the long term capital gains tax is a real benefit.

Last year that benefit came to an end and this year the long term capital gains tax went way up. So there was an incentive to liquidate holdings in 2013 to keep from paying a higher tax this year. This was further enhanced by the fact that the stock market did very well last year. Thus, when all the selling took place to liquidate these assets, a whole lot of personal income tax came flowing into the state governments. So being the irresponsible politicians that most of them are, they didn’t readjust their projections enough for this year. Tax revenues have fallen drastically for many states and now they’re in trouble.   Continue reading →