In July 2017, the Illinois Legislature passed several new bills that dramatically alter the Illinois tax landscape.
Income Tax Changes
Effective July 1, 2017, the state’s income tax rate is permanently increased from 3.75 percent to 4.95 percent for individuals, trusts and estates, and from 5.25 percent to 7 percent for C corporations. Combined with the 2.5 percent replacement tax, this brings the total C corp rate to 9.5 percent. The new rates are immediately applicable. Individuals, trusts and estates with tax years ending on or before June 30, 2017, will be taxed at the lower rates for those tax years. For individuals, trusts and estates with tax years beginning prior to July 1, 2017, and ending after June 30, 2017, the 3.75 percent rate will apply to the period ending June 30, 2017, and the 4.95 percent rate will apply to the period starting July 1, 2017. For example, a calendar-year taxpayer will be taxed at 3.75 percent on income from January 1 through June 30, 2017, and 4.95 percent for the remainder of the year. Individuals, trusts and estates with tax years starting on or after July 1, 2017, will be taxed in full at the new rate. Similar timing rules will apply to C corps. No change has been made to the replacement tax rates applicable to partnerships and S corporations.
The research and development (R&D) credit has been reinstated and is valid for five more years. It’s now scheduled to sunset on January 1, 2022. As such, the credit is available for the 2016 tax year, which had previously sunset. Taxpayers who already filed their 2016 tax returns may consider filing amended returns claiming refunds for credits now available.
The state has decoupled from the Domestic Production Activities Deduction (DPAD) under Internal Revenue Code 199. This is effective for tax years ending on or after December 31, 2017, and is applicable for all taxpayers.
The Earned Income Credit is increasing to 14 percent of the federal credit for tax year 2017, and 18 percent of the federal credit for tax years starting on or after January 1, 2018. This is an increase from the current 10 percent.
The education expense credit for individual taxpayers paying for qualified education expenses is increasing from $500 to $750 per year for tax years ending on or after December 31, 2017. The credit has been eliminated for taxpayers with income above certain limits. No credit will be available to any taxpayer with adjusted gross income (AGI) of more than $500,000 for taxpayers filing a married filing joint (MFJ) return or $250,000 for all other taxpayers, single and married filing separately (MFS).
The standard personal exemption and residential real property tax credit are eliminated for certain taxpayers with income above certain limits. Effective for tax years beginning on or after January 1, 2017, taxpayers with AGI of more than $500,000 for taxpayers filing a MFJ return or $250,000 for all other taxpayers—single and MFS—can’t claim any personal exemptions or residential real property tax credit. There is no graduated phaseout.
A new credit is created for instructional materials and supplies paid with respect to classroom-based instruction in a qualified school if the taxpayer is a teacher, instructor, counselor, principal or aide for at least 900 hours during a school year. The credit is equal to the amount paid for instructional materials, not to exceed $250 per year. The credit isn’t refundable and can’t reduce a taxpayer’s tax liability below zero. Unused credits may be carried over for five years. This is effective for tax years starting on or after January 1, 2017.
Sales Tax Changes
The sales tax exemption for graphic arts has been made permanent. Previously, the law providing an exemption for graphic arts producers sunset in August 2014. The graphic arts exemption is effective July 1, 2017, and falls within the state’s manufacturing machinery and equipment exemption.
The gasohol exemption sunset date has been accelerated from December 31, 2018, to July 1, 2017. Majority blended ethanol fuel and certain biodiesel fuel incentives are extended through December 31, 2023 (original sunset date of December 31, 2018).
There are many changes that weren’t included in the final bill that were in previous versions, including expanded sales tax on services, the Manufacturer’s Purchase Credit, which expired in 2014, and a state tax on sweetened beverages.
Additional guidance is expected from the state with respect to transition rules and regulatory guidance. Contact your BKD advisor for additional information on how these law changes affect you