Long-Awaited Illinois Budget Bill Has Significant Tax Implications
After more than two years without a state budget, the Illinois House voted to override Governor Bruce Rauner’s veto of spending legislation (S.B. 9), thus enacting it into law on July 6. Illinois taxpayers should be aware of the significant changes in the bill that are generally effective July 1, 2017, unless otherwise noted.
Noteworthy individual and business tax changes
- Illinois income tax rate for individuals increased to 4.95 percent from 3.75 percent, but only on net income for the period starting on July 1, 2017.
- Personal exemption allowances cannot be claimed if a taxpayer’s adjusted gross income exceeds $500,000 for joint filers and $250,000 for all other returns.
- Also impacting individuals is the elimination of the tax credit for residential real property if a taxpayer’s adjusted gross income for the taxable year exceeds $500,000 for spouses filing jointly or $250,000 for all other taxpayers.
- Corporate income tax rate in Illinois increased to 7 percent from 5.25 percent, but only on net income for the period starting on July 1, 2017.
- Separate combination reporting for certain industries (including insurance companies, financial organizations, federally regulated exchanges, and transportation services) has been eliminated. Effective for tax years beginning on or after January 1, 2018, these entities must be included in the same combined report as other C corporations engaged in the same unitary business.
- The domestic production deduction under IRC Section 199 has been removed by decoupling it from the federal regime.
- Definition of “United States” has been amended to dismiss the “outer continental shelf” exemption.
- Tax incentives for gasohol ended on July 1, 2017, instead of the previous end date of December 31, 2018.
- The research and development credit is reinstated retroactively to periods beginning January 1, 2016, and extended through January 1, 2022. Research activities within the state are eligible if they are applicable under IRC Section 41.
- Exemption for machinery and equipment used for graphic arts is reinstated under the manufacturing exemption.
- Sales tax discount for blended ethanol and biodiesel fuels is extended to all sales made on or before December 31, 2023.
How this affects tax planning
Most taxpayers should consider whether the tax rate increase will impact payments now versus later (via increased estimates or an increased balance to pay with return) and how to ensure they are not paying too much should they have more income that is subject to the lower rate before the July 1, 2017, increase.
To avoid penalties, most taxpayers base their estimated tax payments on the prior year income tax. If this is the case, nothing needs to be done to avoid penalties. Taxpayers who estimate in this way may owe more than usual due to the tax increase but there is no requirement to change the estimate to avoid a penalty.
Taxpayers making estimated payments based on their expected income (rather than prior year) should consider increasing the remaining estimated tax payments to compensate for the increased tax rate. A penalty will apply if taxpayers have paid in less than 90 percent of the actual tax computed using the new rates.
Since the tax increase is effective July 1, 2017, the default calculation will be to use a blended rate (average of the pre- and post-tax rate change based on number of days during the tax year). If a taxpayer's income is earned unevenly throughout the year, it may be beneficial for the individual to discuss how to ensure he or she is not paying in more tax than necessary. For example, if an individual earned the majority of his or her income before the tax increase took effect on July 1, 2017, using the specific accounting method would reduce the Illinois tax liability by applying the 3.75 percent tax rate to the appropriate amount of income.
How we can help
Our tax professionals stand ready to help you analyze your obligations in the new Illinois tax environment and develop tax strategies that fit your situation.