Illinois governor Pat Quinn recently signed into law tax legislation that increases tax rates for individuals and corporations. Under this new legislation the individual income tax rate will temporarily increase to 5% and the corporate tax rate will temporarily increase to 9.5%. This tax hike is retroactive and takes effect as of January 1, 2011.
Increases to Illinois Individual Income Tax
With the passing of this new legislation comes a 67% tax increase for individuals. After January 1, 2011, Illinois flat income tax on individuals will increase from 3% to 5%. Illinois income tax is a flat tax, so this new 5% tax rate will apply to individuals at all income levels.
This is also going to hit small business owners whose businesses are organized as partnerships, LLC’s, or S-corps taxed as partnerships. These business types are pass-through entities, which means their income “passes through” to the owner’s individual income tax return. These entities will not be subject to the higher corporate income taxes, but their owners will definitely feel the extra taxes on their business income when they file their Illinois individual income tax return for 2011.
Increases to Illinois Corporate Income Tax
The Illinois corporate income tax will increase from 7.3% to 9.5%. According to the Tax Foundation, this new tax hike gives Illinois the distinction of having the third highest corporate income tax in the nation, coming in just behind Pennsylvania at 9.99% and Minnesota at 9.8%.
The 9.5% rate includes the extra 2.5% “Personal Property Replacement Tax” that Illinois corporations pay with the regular corporate income tax. This extra amount is based on corporate net income and was tacked on when local governments lost the power to impose personal property taxes on businesses.
In addition to rate increases, the bill suspends the net operating loss deduction for four years.
Illinois Withholding Tax Increase
Due to the individual income tax increase, paycheck withholdings have also been increased to 5%. According to the Illinois Department of Revenue, the 5% income tax is withheld from:
- Employee compensation based on the number of allowances claimed by the employee,
- Illinois lottery winnings each time a single payment is over $1,000 for both Illinois residents and nonresidents, and
- Other gambling winnings paid to an Illinois resident if the winnings are subject to federal income tax withholding requirements.
Tax Hikes Are Not Permanent
These income tax hikes have been passed to try to fill in a budget deficit of $15 billion, according to the Chicago Tribune. The rate increases are intended to be a temporary measure to shore up the budget, but they will remain in effect for several years.
The corporate income tax rate is scheduled to drop to 7.75% in 2015 and then drop back to the original 7.3% in 2025.
The individual income tax rate will drop to 3.75% in 2015 and then decrease to 3.5% in 2025, which is still 0.5 percentage points higher than the original 3% rate prior to the tax increase.