Taxes may well be on your mind at this time of year—especially with the filing deadline for the 2020 tax year being moved back to May 17 to give taxpayers more time to navigate the unusual circumstances created by the pandemic.
You may already be familiar with tax strategies such as contributing to tax-advantaged retirement accounts or investing in tax-exempt municipal bonds. But there may be some under-the-radar opportunities that are available to you depending on where you live.
We examine several benefits that are available to Illinois residents, who make up the majority of our clients at Leelyn Smith.
Credit for dividends from “high impact” Illinois-based companies.
Generally speaking, the dividends you receive from stocks will be reported as income on both your federal and Illinois taxes.
But Illinois residents receive a credit against their state income taxes for dividends paid by Illinois-based companies that operate in a federally designated Foreign Trade Zone (analogous to international free trade zones) and are designated as High Impact Businesses (providing a high number of jobs and making substantial capital investments). Illinois has a flat state income tax rate of 4.95%, so this credit saves Illinois taxpayers $4.95 for every $100 of dividends they receive from qualifying companies.
Currently, four companies qualify for this dividend treatment:
- Abbott Laboratories (healthcare)
- AbbVie (healthcare)
- Caterpillar (manufacturing)
- Walgreens Boots Alliance (retail/healthcare)
There are no phase-out limits on these credits,soyou can subtract the dividends from your taxable income regardless of how high your income is. It is also important to note that the credit is available to individual taxpayers whether they own the stock directly or whether they receive the dividend through a trust or a pass-through investment partnership.
Of course, while the ability to subtract these dividends from your taxes may be valuable, this benefit alone probably shouldn’t drive your decision to invest in these companies. You still need to ensure that they are appropriate for your portfolio in terms of your risk tolerance and overall asset allocation.
Deduction for contributions to Illinois’ Bright Start 529 plan.
In a previous article, we outlined the many benefits of using a 529 plan to help a loved one pay for college or other levels of education. These benefits are headlined by tax-free growth of the investments if the funds are used for qualified educational expenses and high levels of flexibility in naming and changing beneficiaries.
For Illinois residents, these benefits also include an up-front deduction on your state income tax for contributions made to Illinois’ Bright Start 529 plan. Illinois residents can deduct up to $10,000 of Bright Start contributions each year (or $20,000 for a married couple filing jointly) from their state taxes.
Qualified educational expenses typically include tuition, room and board, technology items, books and supplies, and even some student loan repayments up to a $10,000 limit. Furthermore, expenses for multiple levels of education beyond just college can qualify, including vocational training and some K–12 expenses. If you use the money for non-qualified purposes, you will be taxed on the earnings and also face a 10% penalty.
You can contribute up to $15,000 per year ($30,000 per married couple) to a 529 plan without exceeding the annual gifting exclusion. But under a special rule for 529 plans, you could “front-load” up to $75,000 ($150,000 for a married couple) in a single year and have the money treated as if it were given over a five-year period.
If you have previously contributed to another state’s 529 plan, you can roll over the amount to the Illinois Bright Start plan and deduct the contributions, but not earnings, from your Illinois taxes. If you are a business owner, you could enjoy further tax benefits. Through 2020, Illinois offered a 25% tax credit (up to a maximum credit of $500 per contributing employee) for employers who matched employees’ 529 contributions; it is unclear whether this employer credit will be extended beyond 2020.
Property tax relief.
If you are at least 65 years old, you may be eligible for these Illinois-specific forms of property tax relief:
- Senior Citizens Assessment Freeze Homestead Exemption – If your household income is under $65,000, you might qualify for this exemption, known as the “Senior Freeze.” Essentially, this exemption freezes an eligible homeowner’s equalized assessed value (EAV), which is used to calculate property taxes, at the level of the year before the homeowner’s first application for the exemption. Your tax bills or tax rates won’t necessarily be frozen—only the taxable value of your property. This means your homeowner’s tax bill could still go up if your taxing district increases its levies.
- Senior Citizens Homestead Exemption –The Senior Citizens Homestead Exemption will reduce the EAV of your home by $8,000 if you live in Cook County, or $5,000 if you live in other Illinois counties. If you qualify for this exemption, you automatically also qualify for the General Homestead Exemption, which is $10,000 for homeowners in Cook County and $6,000 for those in other Illinois counties.
- Senior Citizens Real Estate Tax Deferral Program – If your household income is $55,000 or less, you can defer up to $5,000 of real estate taxes and special assessments on your principal residence. The state of Illinois will pay the property taxes and then recover the money, plus six percent annual interest, when you sell or transfer your property.
Illinois also offers other real estate tax benefits that are not age-based, including:
- Long-time Occupant Homestead Exemption (for Cook County only)
- Homestead Exemption for Persons with Disabilities
- Veterans with Disabilities Exemption for Specially-Adapted Housing
- Standard Homestead Exemption for Veterans with Disabilities
- Homestead Improvement Exemption
- Natural Disaster Homestead Exemption
While these property tax benefits could help you reduce your Illinois property taxes, they could preclude you from qualifying for similar benefits in other states. If you have or are considering purchasing a second residence outside Illinois, such as a vacation home, you will want to be aware of this issue.
Tax breaks in other states.
Illinois is not unique in offering a host of under-the-radar tax benefits for its residents. If you are a resident of another state, contact us to discuss some of the benefits that may be available to you. Our team at Leelyn Smith is always available to help you capitalize on the tax-planning opportunities that are available to you—wherever you live.
Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.