Illinois Income Tax Modifications

On January 12, 2011, in the final hours of the final day of the State of Illinois 96th General Assembly’s veto session, both chambers narrowly passed income tax rate increases to individuals, trusts, estates, and corporations.

Net operating losses (NOLs) are also suspended and state spending limitations are imposed with tax reductions to the current pre-increase rates should state spending exceed certain limitations. The bill was signed by Governor Pat Quinn on January 13, 2011, and will be effective for taxable years beginning on or after January 1, 2011. The tax increases are designed to be “temporary” with roll-backs scheduled in 2015 and 2025. However, even after the future rate reductions, the individual tax rate will remain higher than the 2010 rate. The enacted changes are outlined below.

Individual Income Tax Rate

The Illinois income tax rate is increased from its current 3% rate for individuals, trusts, and estates to the following:

  • 5% for taxable years beginning on or after January 1, 2011, and prior to January 1, 2015;
  • 3.75% for taxable years beginning on or after January 1, 2015, and prior to January 1, 2025; and
  • 3.25% for taxable years beginning on or after January 1, 2025.

Corporate Income Tax Rate

The corporate income tax rate is increased from its current 7.3% rate, which includes the personal property replacement tax rate, to the following:

  • 9.5% for taxable years beginning on or after January 1, 2011, and prior to January 1, 2015;
  • 7.75% for taxable years beginning on or after January 1, 2015, and prior to January 1, 2025; and
  • 7.3% for taxable years beginning on or after January 1, 2025.

Net Operating Losses

NOLs are suspended (except for S corporations) for tax years ending after December 31, 2010, and prior to December 31, 2014. NOLs generated during this period and all prior NOLs that could be carried forward into the suspension years are preserved and carried forward for the four-year-period.

Estate and Generation-Skipping Transfer Tax

The Illinois Estate and Generation-Skipping Transfer Tax Act, which lapsed in 2010, has been reinstated for persons dying after December 31, 2010. The reinstated tax is equal to the full amount of the state tax credit on the federal estate tax return that would have been allowed under the Internal Revenue Code in effect on December 31, 2001. The rate is graduated up to a maximum of 16% of the adjusted taxable estate for estates over $10 million. In contrast to the current federal exemption of $5 million, the Illinois exemption equivalent is limited to $2 million. As a result, there may be a need to address estate plans for Illinois residents, particularly those with taxable estates between $2 and $5 million.

Local Government Impact

The Local Government Distributive Fund (LGDF) is excluded from the funds collected from the additional tax imposed under this act. Currently 10% of the collections under the individual income tax are allocated to LGDF for distribution to counties and municipalities based on their proportionate share of the state’s population.