Illinois Income Tax Law Changes for 2017

The Illinois House recently followed the Senate’s lead in overriding Governor Rauner’s veto of the Illinois budget. Senate Bill 9 raises around $5 billion of new permanent income taxes. The individual income tax rates increased from 3.75% to 4.95%, while the corporate rates rose from 5.25% to 7.0%. These rate increases were effective on July 1, 2017.

 

The difficulty with the midyear tax increase is that the law imposes the new tax rate effective July 1, 2017 so that net income is taxed at the 3.75% rate from January 1 through June 30, 2017.  Likewise an income tax rate of 4.95% is imposed on the income earned from July 1 through December 31, 2017.  Illinois taxpayers are provided two options to calculate income subject to different rates in the same tax year.  A taxpayer may divide its full year net income proportionally based on the number of months subject to the former rate and the new rate.  This would effectively result in a tax rate of 4.35% to be applied to the entire 2017 tax year for individuals.  Alternatively, a taxpayer may elect to specifically account for items of income and deduction based on when they were generated during the tax year.  See the following example for this election.

 

Example: A husband and wife file a joint Illinois income tax return for 2017. The husband earns $75,000 plus a $30,000 bonus received in January 2017. The wife earns a salary of $50,000 plus she sold a stock and received a capital gain of $10,000 in November 2017. To the best of our knowledge, the income tax calculations would be as follows:

1/1/17 – 6/30/177/1/17 – 12/31/17TOTAL
Husband salary$37,500$37,500$75,000
Wife salary 25,00025,00050,000
Husband bonus received in January 30,000——30,000
Wife capital gain in November——10,00010,000
Total income$92,500$72,500$165,000
Tax rate 3.75%4.95%
Tax$3,469$3,589$7,058

 

If the taxpayers did not make the election to specifically allocate income, the use of the blended rate of 4.35% would result in an Illinois income tax of $7,178 ($165,000 * 4.35%).  Therefore, the election results in savings to the taxpayers of $120 ($7,178 – $7,058).  Note that this illustration does not factor in other adjustments that may impact the calculation such as exemptions, adjustments, etc.

 

The corporate income tax calculation will work in the same manner. As you can see, additional work will be required on your part in breaking down your income as to whether it was received prior to July 1 or after July 1.

 

For those of you with businesses who have employees, obviously the Illinois withholding on wages paid after June 30, 2017 will be required to be withheld at the 4.95% rate.

 

Other changes included in the new law include the elimination of personal exemptions, education expense credit and the real estate tax credit for single filers with income of $250,000 per year and for joint filers with income of $500,000 per year starting in 2017. The law also increases the earned income credit from 10% to 14% for 2017 and then to 18% in 2018. The cap on the education expense credit will increase from $500 to $750 in 2017 and the teachers’ deduction (for federal purposes) of $250 will become a $250 credit for Illinois.

 

Many of these changes could greatly affect your income tax situation for 2017 and beyond. Please contact us if we can be of any assistance.