The Latest on Illinois Tax Reform

During tax season we focused on bringing you the latest news regarding the Federal 2017 Tax Reform and how it will impact businesses and individuals. While in many instances this tax reform will decrease your federal tax, Illinois has been moving in the opposite direction. 2017 brought along many Illinois changes to individual and corporate income taxes and we have highlighted some of these changes below.

Individual Tax Rates

2017 brought a mid-year change to the individual income tax rate in Illinois. On July 1, 2017 the rate increased from 3.75% to 4.95%, resulting in a blended 2017 rate of 4.35%. For 2018 and years following the rate is now 4.95%. Therefore, while your federal tax will likely decrease, Illinois will bring you an increase. As a result, you’ll want to ensure that your Illinois withholding is reflecting the increase.

High Income Individuals are REALLY Losing Out

For married couples filing joint returns with a federal adjusted gross income of $500,000 or more ($250,000 for all other filers), Illinois has eliminated the following tax provisions for tax years beginning on or after January 1, 2017:

  • The personal exemption allowance (was $2,175 per exemption in 2017, will be $2,000 per exemption in 2018)
  • The K-12 Education Expense Credit
  • The Illinois Property Tax Credit

K-12 Education Expense Credit

Illinois has increased the credit from $500 per family in prior years to $750 per family for tax years ending on or after December 31, 2017. This credit is for tuition and fees paid for public and private schools and certain expenses for home schools.

Instructional Materials and Supplies Credit

For tax years beginning on or after January 1, 2017, a credit is allowed equal to the amount paid during the taxable year for instructional materials and supplies with respect to classroom-based instruction. Or a $250 credit is allowed, whichever is less. This credit is allowed if the taxpayer is a teacher, instructor, counselor, principal, or aide in a qualified school for at least 900 hours during a school year.

Personal Exemption Reduction

The personal exemption allowance for individuals will decrease from $2,175 per person to $2,000 per person for tax years beginning on or after June 1, 2017. For most individuals, this means the 2018 tax year.

C-corporation Tax Rate Increases

Effective July 1, 2017, the C-corporation income tax rate was raised from 5.25% to 7%. C-corporation replacement tax remains at 2.5%. The combined total tax rate for C-corporations in Illinois is now 9.5% (the 7% income tax and the 2.5% replacement tax).

Trust and Estate Tax Rate Increases

Effective July 1, 2017 income tax rates for trusts and estates was raised from 3.75% to 4.95%. While estates now only pay the income tax rate of 4.95%, trusts will pay both the income tax rate of 4.95% and the replacement tax trust rate of 1.5%, totaling 6.45% in total Illinois tax.

Illinois Estate Tax Exemption Remains Stagnant

While the federal 2018 lifetime exemption for gift and estate tax is $11,200,000, the Illinois 2018 Estate Tax Exemption remains at $4,000,000. Illinois still does not impose a gift tax, but for decedents dying in 2018 with a net estate worth over $4,000,000, you will have an Illinois estate tax bill to pay even if you are under the federal lifetime exemption. The Illinois estate tax rate varies and must be calculated using an estate tax calculator on the Illinois Attorney General’s website. The top effective rate is around 16%.

For example, if an individual dies in 2018 with a net taxable estate of $7,000,000, the decedent will have no federal estate tax as he/she is under the $11,200,000 lifetime exemption. However, in Illinois, utilizing the Estate Tax Calculator, the decedent would have a tax of $565,603 due to Illinois, which results in an effective rate of 8.08%.

Cray Kaiser will keep you updated should there be any more Illinois tax reform impacting 2018. In the meantime, please contact us at 630-953-4900 to clarify how these changes may affect you.