Illinois State Tax Income: What You Need to Know

Illinois has a flat state income tax, meaning all taxpayers pay the same percentage regardless of income. This differs from states with progressive tax systems, where rates increase with earnings.

Who Must File

Illinois residents, part-year residents, and nonresidents with income from the state may need to file a return. The Illinois Department of Revenue (IDOR) requires filing if income exceeds the standard exemption, which is adjusted annually for inflation. In 2024, the exemption amount is $2,775 per taxpayer.

Full-year residents must report all income, regardless of where it was earned. Part-year residents—those who moved into or out of Illinois during the year—must file if they had income while living in the state. Nonresidents must file if they earned income from Illinois sources, such as wages from an in-state employer or rental income from Illinois properties.

Some taxpayers should file even if their income is below the exemption threshold. Those who had Illinois income tax withheld but earned less than the filing requirement may qualify for a refund. Individuals who previously claimed certain tax credits but no longer qualify may also need to file to reconcile their tax liability.

Income Sources

Illinois taxes wages, self-employment earnings, rental income, and investments. Business owners operating as sole proprietors or in partnerships must report net profits. Rental income from Illinois properties is taxable, even if the owner lives elsewhere.

Investment income—such as interest, dividends, and capital gains—is taxable if reported on a federal return. Illinois does not offer exclusions for long-term capital gains, taxing the full amount regardless of how long the asset was held.

Retirement income is treated differently. Illinois does not tax Social Security benefits, pension income, or withdrawals from qualified retirement plans, including 401(k)s and IRAs. However, income from nonqualified annuities or deferred compensation plans may be taxable, depending on federal tax treatment.

Determining Tax Rate

Illinois imposes a flat income tax rate of 4.95% as of 2024. Unlike progressive tax structures, this system applies the same rate to all taxable income.

Tax liability is based on federal adjusted gross income (AGI), which is adjusted for Illinois-specific additions and subtractions. Common additions include federally tax-exempt interest from municipal bonds issued outside Illinois. Subtractions often include retirement income, which Illinois does not tax. The final taxable income is then multiplied by 4.95% to determine the tax owed.

Employers withhold Illinois income tax based on state withholding tables. Individuals with additional income sources, such as self-employment earnings or rental income, may need to make estimated tax payments. These payments are due quarterly in April, June, September, and January. Underpayment can result in penalties based on the amount owed and the number of days late.

Credits and Exemptions

Illinois offers credits and exemptions that reduce tax liability. The Illinois Earned Income Credit (EIC) is worth 20% of the federal Earned Income Tax Credit and is refundable, meaning taxpayers receive the difference as a refund if the credit exceeds their tax owed. Low-income workers with dependents benefit the most, as the credit increases with earnings up to a certain threshold before phasing out.

The Property Tax Credit allows homeowners to claim 5% of Illinois property taxes paid on their primary residence. To qualify, the taxpayer must own the home and have paid property taxes during the tax year. Renters do not receive an equivalent benefit, though some local programs may offer relief.

Illinois also provides a K-12 Education Expense Credit, offering up to $750 to parents who incur qualified education-related costs, such as tuition, books, and lab fees for dependents in private or public schools.

Filing Options

Illinois taxpayers can file their state income tax returns online or by mail. The Illinois Department of Revenue (IDOR) offers MyTax Illinois, a free online filing system that provides error checking, real-time confirmation, and refund tracking. Many taxpayers choose this method for its convenience and faster processing times.

Third-party tax preparation software, such as TurboTax and H&R Block, also supports Illinois e-filing. These services often bundle federal and state returns, streamlining the process. Paper filing remains an option, requiring Form IL-1040 and any necessary schedules. Paper returns take longer to process, and errors or missing information can cause delays.

Extensions and Penalties

Taxpayers needing more time to file can request an extension, but this does not extend the deadline for tax payments. Any balance owed must be paid by the original due date to avoid penalties and interest. Illinois grants an automatic six-month extension if a federal extension was filed. Those who owe taxes should submit Form IL-505-I with an estimated payment to avoid late fees.

Failure to file or pay on time results in penalties. The late filing penalty is 2% of unpaid tax if filed within 30 days after the due date, increasing to 10% beyond that period. Late payments incur a penalty of 1% per month on the outstanding balance. Interest accrues at the federal underpayment rate plus 3%. Significant underpayment may lead to additional penalties.

Payment Arrangements

Taxpayers unable to pay their full tax liability by the due date have options to avoid severe penalties. IDOR offers installment agreements for those who owe at least $1,000 and cannot pay in full. These plans allow monthly payments, though interest and penalties continue to accrue. Requests can be submitted through MyTax Illinois or by contacting IDOR directly.

For those facing financial hardship, IDOR may consider an Offer in Compromise, allowing taxpayers to settle their debt for less than the full amount owed if they can prove an inability to pay. Wage garnishments and bank levies are possible consequences for unpaid taxes, so taxpayers struggling with payments should seek arrangements promptly. Communicating with IDOR can help prevent more severe enforcement actions.