An Overview of Illinois State Taxes
Illinois is known as one of the least tax-friendly states in the country, with high tax rates in several different categories. The combined individual tax burden for both state and local taxes averages 8.78%. In the Chicago area, sales taxes are more than 10% of the purchase price, and property taxes top 2% in many counties.
Despite high taxes in some areas, the income tax, which is calculated using a flat rate, is reasonable in Illinois. Also, there are tax exemptions, credits, and deductions available if you are aware of them and understand the required documentation to apply for these tax breaks.
It is important to understand tax regulations in Illinois when you file your tax return so that you can avoid penalties and fines and get the refund and credits that you are due. These tax breaks are especially important in a high-tax state like Illinois.
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Illinois Income Tax
Despite its reputation for high state taxes, Illinois has a remarkably straightforward income tax system.
The state has a flat income tax rate of 4.95%, and everyone pays that rate regardless of their income. A flat rate means you don’t need any tax calculators or tables to determine your payment.
The system also relies heavily on the federal tax code, which means you can follow the same rules for your state return that you follow for your federal return.
When you’re filing your state income tax return in Illinois, you will start with your federal adjusted gross income, or AGI, just as you would on your federal income tax return. The federal adjusted gross income is also known as your taxable income and is your gross income minus deductions. Some deductions are only available in Illinois. For example, Social Security income and retirement income are taxable on the federal level but not in Illinois.
The main advantage of a flat income tax rate is that it is easy to calculate your taxes. Illinois residents simply multiply 4.95% by their taxable income (or 0.0495 times taxable income).
There is a drawback to flat rates, though. The main issue in most flat-tax states is that low-income earners are going to pay more in taxes, dollar for dollar, than those in states that use different tax brackets.
Illinois also offers tax credits, which are different from tax exemptions because they reduce your tax bill, whereas exemptions reduce your taxable income. For example, Illinois has an earned income tax credit for low-income taxpayers and an education expenses tax credit for education-related spending over $250.
Illinois Sales Taxes
Illinois sales taxes have both a state and a local component. The base tax rate for general merchandise is 6.25%. This rate is effective state-wide. However, there are exceptions. For example, the sales tax is only 1% for qualifying food and medicine purchases.
Illinois also has a use tax. This tariff applies to items purchased outside of Illinois without any tax collected at the point of purchase. The use tax, which has the same rate as general sales tax, is primarily for online purchases from vendors outside of Illinois.
Local Sales Taxes
Cities may impose additional sales taxes to fund municipal projects and maintenance. These local sales taxes get added to the base 6.25% rate. Therefore, cities that charge additional sales taxes have a rate of more than 6.25%. Illinois has an online tax rate finder tool where you can look up the local tax rate in your area.
Chicago has a 10.25% combined sales tax rate that includes taxes for the city, county, and public transit authority. The city of Rockford has a combined sales tax of 8.25%, and Aurora has a rate of 8.25% and 8.5% within its special business district. The town of River Grove has the highest sales tax rate in the state at 11%. Cities may also add an extra tax on food and qualifying medicines. They may charge up to 1.25%, which can bring the total sales tax on these qualifying items to 2.25%.
Illinois Property Taxes
Illinois taxes real property (real estate) but not personal property. Real property is any immovable property, which includes land and the buildings and other structures on that land. In general, personal property is anything you can move, such as furniture or electronics.
Local authorities administer property taxes, so the rates may differ depending on where you are in the state. In Illinois, county or city governments oversee property taxes, while special tax districts handle them in some other areas.
Illinois has one of the highest property tax rates in the country. The effective property tax rate is 2.31%, on average. According to USA Today, this is the second-highest property tax rate in the country.
Each property gets taxed based on its assessed value. In most cases, the assessed value is 33.33% of market value. The exception to this rule is farmland, which gets assessed according to its crop yields and income-earning potential.
Tax Relief and Exemptions
While Illinois property taxes are pretty high, there are also a variety of exemptions available to homeowners:
- The General Homestead Exemption is for homes that the taxpayer uses as a primary residence. The exemption equals the increase in assessed value from the previous assessment. The maximum exemption is $6,000 ($10,000 in Cook County).
- The Homestead Improvement Exemption is for home improvements that added value to the property. The maximum exemption is $25,000 in assessed value.
- The Senior Citizens Homestead Exemption is for property occupied by a resident who is 65 or older and is liable for paying property taxes. These taxpayers can qualify for a reduction in the equalized assessed value of up to $5,000 (or $8,000 in Cook County).
Illinois Estate Taxes
Illinois does not charge an inheritance tax. However, it does levy an estate tax. It is one of the 12 states in the country that collect an estate tax. The first $4 million of value in an estate is exempt from the tariff, but the tax can go as high as 16% after that. In practice, however, additional exemptions may lower the taxable estate amount below the threshold. For example, assets left to the spouse of the deceased do not get taxed.
Tips for Filing Taxes in Illinois
The due date for filing your state and federal tax returns is April 15, unless it falls on a weekend or holiday, in which case it will be the very next business day. If you do not pay your taxes on time, you may have to pay late penalties and interest charges. You may, however, file for an extension if you know you will not meet the April 15 deadline.
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This post was updated February 5, 2020. It was originally published February 5, 2020.