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July 2017 | With the passage of the first budget in years, Illinois permanently raised its income taxes by 32%. The state has also begun means testing exemptions and credits for individuals and families whose income exceeds certain limits. Despite these changes, no spending reforms were made and the budget deficits loom large.

Individual, Trusts & Estates Income Tax Rate Increase

“In the case of an individual, trust, or estate, for taxable years beginning prior to July 1, 2017, and ending after June 30, 2017, an amount equal to the sum of (i) 3.75% of the taxpayer’s net income for the period prior to July 1, 2017, as calculated under Section 202.5, and (ii) 4.95% of the taxpayer’s net income for the period after June 30, 2017, as calculated under Section 202.5.”

Comment:

Starting July 1, 2017 Illinois residents and non-residents with Illinois source income will be subject to the new tax rate of 4.95%. Income prior to July 1, 2017 will still be subject to the 3.75% rate.

  • Individuals who have their Illinois taxes withheld by their employer should see the change immediately on their next paycheck.
  • If you are making estimated tax deposits: we will apportion your income starting with our 3rd quarter analysis.

    The bill contains no language regarding any estimated tax payments required in excess of the prior year tax. If your estimated tax liability is less than your prior year tax, we recommend paying in 90% of the current tax using both rates on the apportioned income.

  • We recommend being proactive now. The following items will be needed for estimated tax planning and 2017 return preparation:
    • Self-Employed Individuals & Partnerships should be able to identify income and expense for two periods:

      • January 1, 2017 through June 30, 2017.
      • July 1, 2017 through December 31, 2017.
    • Rental Income/Loss reports should be broken into two periods:

      • January 1, 2017 through June 30, 2017.
      • July 1, 2017 through December 31, 2017.
    • Save all of your June 2017 brokerage account statement(s), mutual fund statements, etc. for 2017. We will need to apportion investment income/capital gains between the two taxing dates.
    • Save your end of June 2017 paystub and your end of August 2017 paystub prior to the 3rd quarter deposit date.

If you need assistance with any of the items above, please feel free to reach out to us.

Corporate Income Tax Increase

“In the case of a corporation, for taxable years beginning prior to July 1, 2017, and ending after June 30, 2017, an amount equal to the sum of (i) 5.25% of the taxpayer’s net income for the period prior to July 1, 2017, as calculated under Section 202.5, and (ii) 7% of the taxpayer’s net income for the period after June 30, 2017, as calculated under Section 202.5.”

Comment:

Starting July 1, 2017 the Illinois corporate income tax rate has increased to 7%. Income earned before June 30th, 2017 will be taxed at the old rate of 5.25%.

Disallowance of Standard Exemption(s) for High Income Individuals

“Notwithstanding any other provision of law, for taxable years beginning on or after January 1, 2017, no taxpayer may claim an exemption under this Section if the taxpayer’s adjusted gross income for the taxable year exceeds (i) $500,000, in the case of spouses filing a joint federal tax return or (ii) $250,000, in the case of all other taxpayers.”

Comment:

Illinois has begun means testing the standard exemption. Unlike the income tax increase that was retroactive to July 1, the standard exemption disallowance begins January 1, 2017. Individuals filing joint returns that have federal adjusted gross income exceeding $500,000 will no longer benefit from the standard exemption on their Illinois income tax return. Single/Head of Household and Married Filing Separately filers have an income limitation of $250,000.

2017 tax estimates should be updated to reflect this change. If any action is required due to the disallowance of exemption(s), it can be done by the 3rd quarter due date: September 15th.

Disallowance of Credit for Residential Real Property Taxes for High Income Individuals

“Notwithstanding any other provision of law, for taxable years beginning on or after January 1, 2017, no taxpayer may claim a credit under this Section if the taxpayer’s adjusted gross income for the taxable year exceeds (i) $500,000, in the case of spouses filing a joint federal tax return, or (ii) $250,000, in the case of all other taxpayers.”

Comment:

Illinois is also means testing the Property Tax Credit. Similar to the disallowance of the standard exemption, the disallowance begins January 1, 2017. Individuals filing joint returns that have federal adjusted gross income exceeding $500,000 will no longer benefit from the property tax credit on their Illinois income tax return. Single/Head of Household and Married Filing Separately filers have an income limitation of $250,000.

2017 tax estimates should be updated to reflect this change. If any action is required due to the credit disallowance, it can be done by the 3rd quarter due date: September 15th.

Updates to the Education Expense Credit

“The credit shall be equal to 25% of qualified education expenses, but in no event may the total credit under this subsection claimed by a family that is the custodian of qualifying pupils exceed (i) $500 for tax years ending prior to December 31, 2017, and (ii) $750 for tax years ending on or after December 31, 2017…”

“Notwithstanding any other provision of law, for taxable years beginning on or after January 1, 2017, no taxpayer may claim a credit under this subsection (m) if the taxpayer’s adjusted gross income for the taxable year exceeds (i) $500,000, in the case of spouses filing a joint federal tax return or (ii) $250,000, in the case of all other taxpayers.”

Comment:

Two important changes to the Education Expense Credit:

  1. For tax years starting on or after January 1, 2018 the credit jumps to $750 from $500
  2. The credit is retroactively disallowed starting January 1, 2017 for individuals who are Married Filing Jointly and have federal adjusted gross income of $500,000 or more, or $250,000 or more of adjusted gross income for Single/Head of Household, or Married Filing Separately individuals.

Creates Credit for Instructional Materials & Supplies

“Sec. 225. For taxable years beginning on and after January 1, 2017, a taxpayer shall be allowed a credit in the amount paid by the taxpayer during the taxable year for instructional materials and supplies with respect to classroom based instruction in a qualified school, or $250, whichever is less, provided that the taxpayer is a teacher, instructor, counselor, principal, or aide in a qualified school for at least 900 hours during a school year.”

Comment:

Similar to the Educator Expense deduction on the Federal return, this new credit allows an individual to take a tax credit up to $250 on their IL-1040 for any instructional materials or supplies bought by a teacher, instructor, counselor, principal, or aide for a qualified school.

The credit can be carried forward up to 5 years and is not refundable.

Increase to the Earned Income Tax Credit

“14% of the federal tax credit for each taxable year beginning on or after January 1, 2017 and beginning prior to January 1, 2018, and (v) 18% of the federal tax credit for each taxable year beginning on or after January 1, 2018.”

Comment:

Taxpayers that are eligible for the Illinois Earned Income Tax Credit will see their credit increase from 10% of the federal tax credit to 14% for the 2017 tax year. Eligible taxpayers whose tax year begins on or after January 1, 2018 will see their Illinois Earned Income Tax Credit increase to 18% of the federal tax credit.

De-Coupling of the Federal Domestic Production Activities Deduction (DPAD)

For tax years ending on or after December 31, 2017, the Domestic Production Activities Deduction allowed under Internal Revenue Code section 199 will no longer be allowed for Illinois income tax purposes. This applies to individuals, trust and estates, partnership and corporate taxpayers.

Comment:

Starting with tax years on or after January 1, 2018, the federal DPAD deduction will be an addback modification on all Illinois income tax forms.

Reinstates the Research and Development Income Tax Credit

The Research and Development Credit had expired for tax years ending after December 31, 2015. The new budget bill reinstated the Research and Development Income Tax Credit which is set to expire on tax years ending before January 1, 2022.

Effects of the Illinois Tax Change on your Individual Federal Return

For individuals that are itemizing, you can expect a somewhat greater tax benefit from deducting your increased Illinois state income taxes.

. . .

The last time Illinois raised its income tax we were told the additional tax revenue would fix the economy, tackle the pension debt, and pay down the $8 billion deficit. From 2011 to 2014 the state brought in roughly $30 billion in revenue, but only reduced its deficit by $1.3 billion. When the income tax increase expired as of 12/31/2014 the state’s budget deficit was roughly $6.7 billion and the pension deficit was $111 billion. In other words, we grew deeper into the red despite the income tax increase.

With the recent budget bill Illinois has again increased its income tax rate, and again passed a bill without any meaningful reform. Does this sound familiar?

At the time of bill’s passage, Illinois’ budget deficit is estimated at $15 billion. According to Moody’s, the Illinois pension liability is roughly $251 billion. If history tells us anything, we are not confident the state’s income tax increase will put a meaningful dent into the deficit problem Illinois is currently facing.

As always, if you have any questions we’re here to assist you and your family.