Illinois Raises Tax Rates & Changes Tax Credits/Deductions

Update By: Kelley Hare, CPA, MST, Tax Partner

In a surprise overturned veto, the Illinois government has recently enacted new law that takes effect 7/1/2017.

Read the below article for the most recent IL tax changes affecting all taxpayers and businesses.

Withholding Rate Changes (Affecting Employers and Employees)

Employers - You must now immediately adjust withholding tax rates in your payroll records and inform employees.

The Illinois Income Tax rate for individuals has increased from 3.75 percent (.0375) to 4.95 percent (.0495), effective 7/1/2017.

The new income tax rate applies to Illinois income tax withholding (either required or by voluntary agreement) on Illinois income, including, but not limited to:

  • Wages and other employee compensation including bonus, overtime, and commission pay, usually reported to the recipient on a Form W-2.
  • Non-wage income such as pensions, annuities, unemployment income, and sick pay that you have agreed to voluntarily withhold, usually reported to a recipient on a Form 1099.
  • Gambling and lottery winnings (paid by the entity issuing the winnings such as the Illinois Lottery or a casino), usually reported to a recipient on a Form W-2G.
  • Amounts paid to purchase rights to Illinois lottery winnings reported on a Form 1099-MISC.

Booklet IL-700-T, Illinois Withholding Tax Tables, has been updated and is available on the Illinois Department of Revenue website.

What are the changes to the personal exemption amount that affect withholding?

For tax years beginning on or after January 1, 2017, the personal exemption allowance may not be claimed if the taxpayer’s adjusted gross income for the taxable year exceeds $500,000 for returns with a federal filing status of married filing jointly, or $250,000 for all other returns. Employees who exceed these income amounts may complete a new Form IL-W-4, Employee’s and other Payee’s Illinois Withholding Allowance Certificate, to update their exemption amounts and increase their Illinois withholding.

Individual & Business Tax Changes

What are the changes to Illinois Income Tax?
Tax Rates

Effective July 1, 2017, income tax rates increase as follows:

  • For individuals, trusts, and estates, the Illinois Income Tax is increasing from 3.75 percent (.0375) to 4.95 percent (.0495).
  • For corporations (excluding S corporations), the Illinois Income Tax is increasing from 5.25 percent (.0525) to 7 percent (.07).
Earned Income Tax Credit

For tax years beginning on or after January 1, 2017, and before January 1, 2018, the earned income credit is increased to 14 percent of the federal earned income tax credit. For tax years beginning on or after January 1, 2018, the earned income credit increases to 18 percent of the federal earned income tax credit.

Standard Exemption Allowance

For tax years beginning on or after January 1, 2017, the personal exemption allowance may not be claimed if the taxpayer’s adjusted gross income for the taxable year exceeds $500,000 for returns with a federal filing status of married filing jointly, or $250,000 for all other returns.

K-12 Education Expense Credit

For tax years ending on or after December 31, 2017, the maximum amount of the K-12 Education Expense Credit has been increased to $750 per family. The K-12 Education Expense Credit is not allowed if the taxpayer’s adjusted gross income for the taxable year exceeds $500,000 for returns with a federal filing status of married filing jointly, or $250,000 for all other returns.

Illinois Property Tax Credit

For tax years beginning on or after January 1, 2017, the Illinois Property Tax Credit is not allowed if the taxpayer’s adjusted gross income for the taxable year exceeds $500,000 for returns with a federal filing status of married filing jointly, or $250,000 for all other returns.

Instructional Materials and Supplies Credit (New)

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 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. The credit may not be carried back and may not reduce the tax liability to less than zero. Any excess credit may be carried forward and applied to tax liabilities for five years following the excess credit year.

Domestic Production Activities Deduction

For tax years ending on or after December 31, 2017, the Domestic Production Activities Deduction allowed under Section 199 of the Internal Revenue Code must be added back to the adjusted gross income (for individuals) or taxable income (for all other taxpayers).

Research and Development Credit

The Research and Development Credit has been reinstated and is retroactive for the 2016 tax year. The department will provide updated forms and instructions in order to claim any credit that was not previously allowed.

How will this impact my 2017 tax filings?

There will be two methods to calculate your taxes for the change in the rate when you file your tax return.

Method 1: Apportionment rate (blended rate)
  • In a simple method that will not require any other computations, taxpayers can use a blended rate and apply that to their total income reported to Illinois for the year.
  • The rate will be approximately 4.35% for individuals. Corporate rates will be computed based on your fiscal year.
Method 2: Specific Accounting (split income between the two rates)
  • Taxpayers will be able to utilize Schedule SA to allocate their income earned to the two different periods where the rate changes occurred. This would be advantageous for taxpayers who earned income unevenly throughout the year, specifically if they earned more income during the first 6 months, where the rates were lower. IDOR will be releasing instructions for the schedule at a later date.

Taxpayers are encouraged to review their remaining estimated taxes if you are paying in quarterly estimates, to ensure they account for the new rate.

What are the changes for Sales and Use Tax?

Effective July 1, 2017, the manufacturing and assembling machinery and equipment exemption is expanded to include graphic arts machinery and equipment.

Effective July 1, 2017, tax is imposed on 100 percent of the proceeds from sales of gasohol, which eliminates the current 20 percent exemption.

The 100 percent exemption for majority blended ethanol fuel, 100 percent biodiesel, and biodiesel blends with more than 10 percent but no more than 99 percent biodiesel, is extended through December 31, 2023.

The new Publications covering these items can be found at www.revenue.state.il.us.

For additional information on any of the changes and how it might impact you or your business, Porte Brown is here to assist you.

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