Sep 07, 2017

Review and adjust your Illinois income tax withholding

In case you missed it while on summer vacation, Illinois recently increased its income tax rate for individuals and businesses effective for income received on or after July 1, 2017. The income tax rate for individuals, trusts and estates has increased from a flat rate of 3.75 percent to a flat rate of 4.95 percent, while the corporate income tax rate has increased from a flat rate of 5.25 percent to a flat rate of 7 percent.

Illinois’ new income tax law has also modified several deductions and exemptions by adding phase-outs based upon a taxpayer’s adjusted gross income (AGI). Beginning with the 2017 tax year, a taxpayer may not claim the Illinois standard personal exemption allowance ($2,175 per taxpayer and each dependent) if the taxpayer’s AGI exceeds $250,000 ($500,000 for a married couple). Similarly, a taxpayer’s Illinois property tax credit phases out if the taxpayer meets the same AGI thresholds. The K-12 Education Expense Credit has been increased to $750 per family but the same AGI phase-out applies.

The law did not modify the deduction allowed for contributions to an Illinois-based 529 plan for higher education expenses, also known as the Bright Start Illinois 529 college savings program. A joint filer can still contribute up to $20,000 per year ($10,000 for single) and receive a state income tax deduction valued at $990. Thus, Illinois taxpayers saving for a child or grandchild’s higher education expenses are further motivated to utilize the Illinois 529 plan based on the greater tax savings.

Since the change to the rates occurred in the middle of the calendar year, all taxpayers should review and adjust their tax withholding and estimated tax payments now in order to avoid underpayment interest and penalties. Individuals paying estimates based on their actual 2017 tax liability must increase their third and fourth quarter estimate payments. Businesses with a fiscal year ending after July 1 can apply the two rates by either: (1) apportioning their income based on the number of days that the two separate rates applied; or (2) applying a specific accounting method that in effect treats the fiscal year as two separate years based upon the rate change date. Thus, if more income was earned prior to July 1, a business will benefit by applying specific accounting.

Contact a Chuhak & Tecson Corporate Transactions and Business Law attorney for more information regarding these tax changes.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client Alert authored by: William P. Ellsworth, Principal

This alert originally appeared in the Fall 2017 Corporate Focus newsletter.