Newly Enacted Illinois Budget Brings Tax Rate Increases

As part of the recently passed budget plan, the Illinois state government made the decision to increase tax rates for state residents and businesses. The tax rate increases, which come amidst controversy over the Illinois House overriding Governor Bruce Rauner’s vetoes, have taken affect as of July 1, 2017.

As a result of the new budget plan, individuals, trusts, and estates will see an income tax increase of 1.2%, with the rate rising from 3.75% to 4.95%, while corporations will be met with a 1.75% increase, bringing the current rate of 5.25% to 7%. S-corporations and partnerships will not be subject to the rate increase.

For calendar year filers, tax returns for the year ending December 31, 2016 are not affected by the change. However, for those fiscal-year, short-year, and 52/53 week filers required to make estimated payments during 2017, the estimated payments must be paid at the newly enacted higher rates for the remaining portion of the year. This does not affect those with fiscal years ending on or before June 30, 2017.

The rate changes will also affect those who withhold income tax such as employers and payroll service providers. Those who withhold income tax will be required to adjust their withholding upward to the refreshed rates immediately. This requirement includes withholding on employee compensation such as wages, bonuses, overtime and commission pay, non-wage income such as pensions, annuities, unemployment income, and sick pay, gambling income and amounts paid to purchase rights to Illinois lottery winnings.

The following additional revisions are or will soon be effective:

The education expense credit has been increased from $500 to $750 for tax years ending on or after December 31, 2017.
The Illinois earned income tax credit jumps from 10% to 14% of the federal earned income tax credit for years beginning after 2016 and from 14% to 18% of the federal earned income tax credit for taxable years beginning after 2017.
For taxable years beginning on or after January 1, 2017, those who work at public or non-public schools may claim a credit for the lesser of the amount spent on classroom instructional materials and supplies or $250.
For taxable years beginning on or after January 1, 2017, taxpayers married filing jointly with adjusted gross income (AGI) of $500,000 or more, and individual taxpayers with AGI of $250,000 or more, may not claim the education expense credit, the 5% credit for property taxes paid on your principal residence, or personal income tax exemptions.
For taxable years ending on or after December 31, 2017, domestic manufacturing and other similar businesses will not be allowed to deduct the Domestic Production Activities Deduction under IRC Section 199.
For taxable years ending before January 1, 2016, taxpayers were allowed to take a research and development credit. This credit was removed, but will be reinstated retroactively, making the credit permanent. As of now, this R&D credit will remain for tax years ending prior to January 1, 2027.

Should you have any questions, please reach out to your contact at ECS Financial Services, Inc.

About the Author - Sanjay Wadhwani received his Bachelor of Science Degree in Finance from University of Florida in 2004 and a Master of Science in Taxation from University of Central Florida in 2006. Mr. Wadhwani is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants and the Illinois Certified Public Accountants Society. Mr. Wadhwani has over 10 years of accounting and tax experience. His areas of expertise include individual, corporate, and partnership income tax compliance and consulting.