Illinois Tax Increase Retroactive to January 1 for Individuals and Businesses
In an effort to pay for the budget deficit, Illinois state leaders passed legislation that substantially increases both corporate and personal income tax rates. The law is effective retroactively to January 1, 2011 and also amends estimated tax, net loss deduction, and estate tax provisions.
“The retroactive change means individuals will see withholding changes to their paycheck immediately,” says Carolyn Biagi, a tax manager with LarsonAllen. “Businesses must manually adjust withholding rates or work with their payroll software vendor to make the adjustments.”
Personal income tax and withholding rates
Personal income tax rates affecting individuals, trusts, and estates will increase from 3 percent to 5 percent, an increase of 67 percent. The rate is in effect for four years after which it decreases to 3.75 percent in 2015 and remains there for ten years. Beginning in 2025, the amount is reduced to 3.25 percent.
The new rate of withholding applies to:
- employee wages and salaries paid in the state of Illinois
- unemployment paid to a state resident who has asked to have Illinois taxes withheld
- gambling or lottery winnings in Illinois paid to state residents
The Illinois Department of Revenue (IDOR) has already adjusted its tax tables and made them available to the public. If you use an automated payroll method to figure your withholding, use the following formula:
.05 x (Wages - ((IL-W-4, Line 1 allowances x $2,000) + (IL-W-4, Line 2 allowances x $1,000)))
number of pay periods in a year
Corporate income tax rates
The corporate income tax rate increases from 4.8 percent to 7 percent. The rate drops to 5.25 percent from 2015 through 2024 and reverts back to the original 4.8 percent rate in 2025. Replacement taxes are not affected under the new law.
Net loss carryover
In the past there were provisions in the tax law that would allow a business to carry back or carry forward a net operating loss (NOL) from a tax year to get a refund on taxes paid. The new law suspends NOLs from being used in 2011, 2012, and 2013. Since there is no carry back provision at this time, the NOLs may only be carried forward and can be used starting with years ending on December 31, 2014 and later.
“Furthermore, the carry forward years that can be utilized are extended by the number of years they are suspended,” says Herbert Brenner, a tax manager with LarsonAllen. “For example, let’s say there is a net loss from 2008, 2009, and 2010 which hasn’t been utilized yet, and in 2011 the corporation has income. The losses cannot be utilized in 2011 or any other taxable years ending prior to December 31, 2014. However, it can be utilized in years after that.”
Net income of fiscal year taxpayers
Net income is determined in one of two ways. The default method is prorated based on the number of days prior to January 1 and after December 31 against the total days in the year.
In addition, a taxpayer can elect to use a specific accounting method to determine net income on a cut-off basis from the beginning of the taxable year through December 31 and from January 1 through the end of the taxable year.
Estate and generation-skipping transfer tax
In the event of an individual dying after 2010, the state tax is equal to the state tax credit that would have been allowed under the Internal Revenue Code provisions in effect on December 31, 2001. The exclusion amount is $2 million.
Estimated taxes
Under the old law, to be “safe harbored” from penalties and interest you either had to pay 90 percent of the current year tax or 100 percent of prior year tax. Due to the increase in tax rates, the safe harbor amount on installments due after January 31, 2011 and prior to February 1, 2012 will increase to 150 percent.
Also, if the prior year return did not show a tax liability, you may not use this provision to avoid penalties and interest. If in the prior year (2010) you had a zero tax liability, then you are still required to pay 90 percent of the current year tax to be safe harbored.
How we can help
Although the withholding changes need to be made immediately, some of the tax implication will not be clear until 2011 taxes are filed in 2012. We can help you understand how this legislation will impact your business or individual tax decisions.
Additional resources
Carolyn Biagi, Tax Manager
cbiagi@larsonallen.com or 618-310-1674
Herbert Brenner, Tax Manager
hbrenner@larsonallen.com or 847-597-1851
View our tax principals.