Illinois Tax Changes for 2011

By David Wells, CPA

On January 12, 2011, Illinois lawmakers passed an increase to the 2011 income tax rate for individuals and businesses. The individual tax rate increased from 3% to 5% and the corporate tax rate increased from 4.8% to 7.0%. Both of these changes are effective through 2015. The Illinois Replacement tax remained constant at 2.5% so the total corporate tax rate is 9.5%.

If you are an employee, you may have noticed that your Illinois withholding increased while the Social Security tax withheld decreased. The Social Security mandatory withholding rate decreased from 6.2% to 4.2%. In a relatively short amount of time, the Federal taxes decreased by 2%, and the Illinois tax rate increased by 2%. Depending on your tax situation and other factors, your net paycheck may not have been affected once these changes were both implemented since the increase in one tax offset the decrease in another.

For many individuals that are not employees and do not have Illinois taxes withheld from their wages this change is important in calculating estimated tax deposits. If the old 3% rate is used rather than the effective 5% for 2011 a penalty for late-payment of estimates may be imposed. If you are receiving a paycheck, you may want to double-check to make sure your payroll processor is withholding your Illinois tax at the correct rate so you can avoid any unforeseen surprises when you prepare your 2011 Illinois tax return. This information will be helpful when comparing your 2011 and 2010 Illinois tax returns. If your income is relatively the same in both years you will notice that you are paying approximately 66% more in Illinois taxes in 2011 compared to 2010.

Corporations that reasonably expect to have more than $400 in income and replacement tax for the year are also required to make estimated tax deposits. Basically, if a corporation’s Illinois taxable income is expected to be $4,200 or higher it should be making estimated tax deposits. Due to the 30% increase in corporate taxes, the threshold to require a corporation to make estimated tax deposits may be reached quicker than in previous years. The payments can be made by check with Form IL-1120-ES or online on the Illinois Department of Revenue website.  This is a tax issue that should be monitored throughout the year to avoid any late-payment penalties.