On July 6, 2017, the Illinois House followed the Senate and voted to override Gov. Bruce Rauner’s veto of the budget and tax increase bills. Senate Bill 9 raises $5 billion of revenue through a permanent income tax increase. The main two revenue raisers are the increases to the individual and corporate income tax rates. The individual, trust and estate income tax rate will rise to 4.95% from 3.75%. The C corporation income tax rate will rise to 7% from 5.25%. C corporations also pay a 2.5% replacement tax for a new total rate of 9.5%.
The tax rate increase is not quite a simple transition to a new rate. The new rates are effective retroactively to July 1, 2017, so individuals and the vast majority of C corporations will face a tax year with different rates applicable to the periods before and after July 1. The general rule will allocate income ratably amongst the two periods using a blended rate. For individuals that would equate to a blended rate of 4.35% for 2017 (six months at 3.75% and six months at 4.95%). An election is available to taxpayers to use a special accounting to specifically allocate income before and after July 1.
- Planning Point – Save that June 30 paystub if you have received a bonus in the first half of 2017 as that can be used to have that income taxed at the 3.75% rate.
Senate Bill 9 includes other revenue raisers besides the rate increase. The personal exemption, education expense credit and real estate tax credit have all been modified. These three tax benefits are eliminated in 2017 for single filers earning more than $250,000 per year and joint filers earning more than $500,000 per year.
The bill does provide some tax benefits aimed at lower income households that will take effect in 2017:
- The earned income credit increases from 10% of the federal credit to 14%, and then to 18% in 2018.
- The cap on the education expense credit increases to $750 from $500.
- A new tax credit of $250 is created for teachers using personal funds to purchase classroom supplies.
The Research and Development (R&D) tax credit that expired January 1, 2016 has been retroactively extended to January 1, 2022. It is the intent of the General Assembly that the R&D credit “shall apply continuously for all tax years ending on or after December 31, 2004 and ending prior to January 1, 2022.” We expect guidance to be issued on how the Department of Revenue will logistically process this legislative intent to the 2016 returns already filed.
Senate Bill 9 contains a number of other provisions; here are a few more key points:
- For taxable years ending on or after December 31, 2017, Illinois has disallowed the federal domestic production deduction, formally known as the Section 199 deduction.
- The sales tax exemption for graphic arts equipment has been restored.
- The replacement tax rate on corporations, partnerships and trusts remains unchanged.
These tax increases along with their effective date will greatly affect your tax situation. Please contact us to discuss how this impacts you.