Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker dealer, member of FINRA, SIPC. Investment advisor representative, Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now, here’s today’s Financial Focus Program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus, brought to you each and every Wednesday morning right here on KROS. Well, this is Nate Kreinbrink. I have Andy Ferguson. It is third Wednesday of the month.
Andy Fergurson:
Yeah.
Nate Kreinbrink:
October’s flying by.
Andy Fergurson:
Tax season’s finally over.
Nate Kreinbrink:
Tax season is almost over, and then, well, technically yes, tax season is over. The extended deadline of October 15th has came and went, but that means you’re closer to the real tax season.
Andy Fergurson:
That’s true, and the procrastinators are the ones we’re going to do now, but it’s still fall. It is still football and-
Nate Kreinbrink:
It is still fall. It’s starting to feel like fall. I know we have a football game Friday night and temperature wise, definitely felt like a October football game, a little cooler. Not bad, not terrible.
Andy Fergurson:
Should be good this week though, high 60s at night. So our last game is Thursday because we’re playing at Roger Craig, and so we got a Thursday game for the last one, which is nice to get to end the day early. Then we go right into trick or treating season, and we actually have a trunk or treat at church that we’re doing the Friday after this coming Friday. So yeah, pumpkins and trick or treating, and before we know it, we’re going to have frost and then snow and then taxes.
Nate Kreinbrink:
It is that time of the year where it just seems like everything is overlapping. Again, you have football on TV, hockey started, basketball is starting, baseball World Series is still on TV. I started-
Andy Fergurson:
Yeah, it’s like the best, most wonderful time of the year.
Nate Kreinbrink:
… coaching a middle school team out at Northeast this year and we had our first basketball practice last night, but yet there’s still football. It’s that overlapping… It’s fun, it’s cool. I love it.
Andy Fergurson:
And cross country. So my daughter’s got districts for cross country tonight, and so she’s going to make her run at state as a freshman so we’re excited about that too. So it is that weird time where you get about two weeks of everything together, and it’s awesome.
Nate Kreinbrink:
It’s cool. It is cool. Well, let’s talk taxes while you’re here.
Andy Fergurson:
I love talking taxes. Let’s do that.
Nate Kreinbrink:
Let’s do that. Again, you came up with a list again and we’ll see how many we can get through of these.
Andy Fergurson:
All right.
Nate Kreinbrink:
But again, we get to this time of the year and it’s planning and what’s new, what’s on the horizon.
Andy Fergurson:
Sure, yeah.
Nate Kreinbrink:
And one thing that is different is the above the line charitable cash contributions, which is new, that it’s going to show up on your tax return that is different from what it’s been in the past couple of years.
Andy Fergurson:
Yeah. And it’s important to pay attention to for those of us that live in Iowa and Illinois too, because for the last, oh geez, five years or three or five years in Iowa, it hasn’t really mattered if you’ve made cash contributions to charity because the itemization level has been so high, and in Iowa, you get the same itemization as you do on the federal form. So for a little while, you could itemize in Iowa and not itemize on the federal form, but now you can’t, and for the longest time in Illinois, the charitable contributions haven’t mattered, because again, you can’t itemize in the state if you don’t itemize on the federal form. And so since the federal form has taken that itemization really out of the equation, people have stopped reporting their charitable contributions because it really just hasn’t mattered.
Well, the law changes this year for 2026 where there is an above the line deduction, which means you don’t have to itemize to get it, but you can get up to a thousand dollars a person for cash contributions to charity. So whether you live in Iowa or Illinois, if you haven’t been in the habit of reporting those contributions, you should do it. If you pay tithing to your church, if you give to the Humane Society or to the Boy Scouts or to the YWCA or any of those things that you give cash contributions to, report those this year because they’re worth whatever your tax rate is worth.
So if your tax rate is 22% on the federal form and 5% in the state, then yeah, you get that amount, so if you donate 100 bucks, you’re getting 25 bucks off your taxes. Those donations have to be made in the calendar year though, so you won’t be able to come back to your tax preparer in March and say, “Oh, can I add this charitable contribution?” No, you’ve got to make it in the calendar year. But it’s new this year, so if you are somebody who does that already, make sure you report it to your preparer, and if you’re not and you’re interested in it, 2000 bucks, that’s 500 bucks off your tax return if you live in Illinois or 500 bucks more refund if you live in Illinois. It’s a little less than that if you live in Iowa, but it’s worth keeping track of, for sure.
Nate Kreinbrink:
Well, and I think too, we always talk changes and how they come into it, and this time of the year is that planning period. And again, sometimes you don’t know what you don’t know, and like you said, the standard deduction has basically been the standard that most people have went by, so again, you make those contributions, it’s great. It’s a very generous gesture of you, but from a tax perspective, it’s really not helping you at all.
Andy Fergurson:
I always tell people when they bring me those deductions, or the last couple of years I’ve been telling people, “Look, that’s going to help you get into heaven, but it’s not going to change your tax return.”
Nate Kreinbrink:
Right.
Andy Fergurson:
But this year, it’s going to change your tax return, so make sure you report it. But it’s cash contributions or contributions by check, so Salvation Army, Goodwill, the places where you’re taking clothes and furniture and stuff, that’s not counting. IRAS, those places, those still will help you get into heaven, but they’re not going to change your tax return.
Nate Kreinbrink:
So again, something to look at as we near that 12/31 deadline. Another topic as far as looking at how it’s going to impact your tax return and what that may do for it is understanding if you can make contributions into a Roth or traditional IRA. And again, you start looking at this and the differences of now versus later on the tax consequence, whether it goes into a after tax Roth, whether it goes into a pre-tax traditional, understanding what age you are and what the limit is, again, could have an impact on how that tax return turns out.
Andy Fergurson:
Yeah, absolutely. So this isn’t new to 2026, but it’s relatively new to Iowa. It’s always been the case in Illinois, but really, if you live in Illinois or if you are over 55 and live in Iowa, you should probably never put money directly into any Roth account. Well, that’s not true, unless you’re doing a backdoor Roth or something like that, but if you’re making your initial contribution and you’re deciding to put it into a Roth because you want that money to grow tax-free, what you may want to consider or talk about with your tax professional is can I put that into a traditional account first and then transfer it to a Roth? And the reason for that is if you put the money into… Either way, you’re going to pay federal taxes on that money, but if you put the money into a traditional account first and then transfer it to a Roth, what happens is you don’t pay state tax on it.
So if you are at work and you’re over 55 and you live in Iowa or you’re any age in Illinois, if you put money directly into a Roth 401(k), you’re going to pay state tax on that because that money’s going to be included in your adjusted gross income. But if you were to put that same money into a traditional 401(k), and then the very next day, convert it to a Roth, you wouldn’t pay the state tax on it, and that is something that people don’t really understand. And the reason you wouldn’t pay the state tax on it is when that transfer comes out of the traditional and goes into the Roth, it’s a taxable transaction, but in Illinois, it’s not taxable because it’s a distribution from a retirement account. In Iowa, if you’re over 55, it’s exempt from tax because it’s a distribution from a retirement account. And so you can save the state tax rate, which in Illinois is 4.95%. In Iowa it’s 3.8%. You can save that tax rate just by putting it into the traditional first and then converting it to the Roth.
Nate Kreinbrink:
It’s all good things to look at, and again, there are qualifications, there’s income thresholds for putting into an IRA or putting into a Roth, and as you said, the age differences, whether you live in Iowa versus Illinois. But when you start thinking of saving four or 500 bucks on the state side with that, some of these other scenarios, it starts adding up over time. And when you start looking at taxes, not all taxes are the same, and I think when people look at the different types of the accounts and we say, “Well, if you would’ve paid ordinary income tax, you would’ve paid this, but if we could have paid capital gains tax, preferably long-term capital gains tax, there could be a savings for you.” And again, understanding how different types of accounts that you have, the tax that they do and the type of tax that they are is also important.
Andy Fergurson:
Yeah, that’s a big one that we’ve been doing a lot of lately is helping people understand that there’s a difference between, like you said, ordinary income and long-term capital gains. Short-term capital gain and ordinary income are the same thing. They’re treated the same way on your tax return, but long-term capital gains gets a favorable rate, and for many of the people that I do taxes for, that rate can be 0%. So if you have CD interest, you’re going to pay ordinary income on that interest, but if you take that same money and put it into a tool that returns capital gains instead of ordinary income, your rate could be 0% on that same money. So think about if you get $1,000 of interest from the bank, $1,000 of interest on the bank may cost you 20, 22%, so $2,000 on… I’m sorry, not 2000. $200 on $1,000 worth of income. Well, if you were getting that at 0%, that’s $0, right? So you’re paying $200 more in tax for the same rate of return just because of the type of money that it has.
And so it’s important to go over that with your financial advisor, with your tax preparer, see if they can help you understand how that works so that you pay a little bit less tax. We all want to make money, we want our money to make money, but we don’t want to have our money make money and then give some of that money to the government if we don’t have to.
Nate Kreinbrink:
Well, and I always say too, and we look at it with conversion strategies and all this stuff, and what we went over today is no different. It’s not what you have, it’s what you keep, and again, I always say I will pay my fair share of taxes, but I don’t want to pay more than what I have to. And understanding some of these strategies and understanding how they fit to you as you age, as you get to a different age threshold, sometimes more of these strategies become relevant to you and it’s just understanding what it is that you can do to, again, like you said, minimize that tax liability that you have.
Andy Fergurson:
And think about if you’re giving 25% of your interest income back to the government, that changes your 5% rate to a 4% rate. That’s at 20%. At 25%, it changes your 4% to a 3%, right? So just something to consider. There’s good options out there.
Nate Kreinbrink:
All great stuff. Give Andy a call and his team. They’d be happy to sit down with you. Did want to mention real quick before we run out of time that every month, NelsonCorp is featuring a new charity of the month. For the month of October, it is the Clinton Pereira Earthquake Relief Fund. Again, this is Nate and Andy bringing you this week’s Financial Focus. Thanks for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management and Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker dealer, member of FINRA, SIPC. Investment advisor representative, Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.