Saturday, October 1st, 2016

Florida looks good and not just because of the snow

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The Milwaukee Journal Sentinel has an article covering the failure of the state legislature to bring the state’s tax code into line with the federal government’s tax law when it comes to the conversion of your IRA to a Roth IRA:

The new federal rules unleashed a barrage of advertising from financial service firms and a host of stories in the media encouraging traditional IRA holders to consider converting to Roth IRAs. The advantage of a Roth is that withdrawals are tax-free.

But Wisconsin’s holdout means investors who make conversions could pay initial penalties of as much as 5.3% of the money they transfer, and 2% a year from there on.

In addition, revenue-strapped Wisconsin may be leaving tax money on the table, at least for now. That’s because higher-income people might want to pay today’s tax rate on the money they convert to a Roth IRA rather than risk paying higher taxes later as they withdraw money from traditional IRAs.

“You have some rich people who might want to pay more taxes, but they’re not going to until this is resolved,” said Sadoff, who is a portfolio manger at Sadoff Investment Management LLC. “It should be a layup for the state to do this.”

You might remember I wrote on the same issue for the MacIver Institute:

Unlike the rest of the country, Wisconsin law did not change with the federal law. People trying to take advantage of the change in federal law will still get hit with the entire tax burden in the year of the distribution.

The change in Wisconsin law to match federal law was included in the governor’s budget sent to the legislature. However, Democrats in the legislature took the provision out when the Department of Revenue said it would result in a net loss of $930,000 in 2010-2011 and $2.2 million in 2011-2012.

The Democrats in the legislature were desperate for every last penny they could find to pay for their spending in the last budget, so Wisconsin became the only state not to put its tax code in line with the federal government.

A second look at the issue by the Legislative Fiscal Bureau said that the Department of Revenue was incorrect. Under current Wisconsin law, Wisconsin’s 3.33% tax on early distributions and 2% tax on excess contributions will discourage many Wisconsinites from taking advantage of the federal tax law change. By bringing Wisconsin law in line with federal law, the state would actually see an additional $1 million in 2010-2011 and $1.5 million in 2011-2012. It would actually increase revenue in the short term during Wisconsin’s budget crunch, and the decreases in tax revenue would only take place after 2012.

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