The state of Illinois boasts some of the highest property and sales tax rates on average compared to other states in the US, although it utilizes a flat income tax rate and exempts retirement income and Social Security from taxation. Illinois imposes a flat income tax rate of 4.95% on its residents. The state has an average property tax rate of 2.08% of a home’s assessed value, with the Chicagoland area (the city of Chicago and its surrounding suburbs) having the highest property taxes, regarding real estate investments. Also, the state has a 6.25% sales tax rate with a combined average of 8.82% when local sales tax is added, according to 2023 Tax Foundation data.
When we focus on the income taxed in Illinois, there are two different categories, so to say. If you work in Illinois but don’t live there, you generally need to pay income tax to the state. However, if you reside in Wisconsin, Iowa, Kentucky, or Michigan, which have reciprocal agreements with Illinois, you only need to pay income tax to your primary state of residence, rather than to both the state where you work and where you live. That last is to avoid double taxation, which could be considered abusive. Below you’ll also find some information about real estate and property taxes.
Income Taxes in Illinois – Which Ones Pay and Which Ones Are Exempt
In Illinois, unemployment compensation is considered taxable income, regardless of whether you’re a resident or employed in the state, except for railroad unemployment. The Illinois Department of Revenue’s website has additional details that you can check here for further data. What about pensions or retirement? Are those taxable? Well, not really, because in the Prairie State pension distributions or retirement plan income, including IRAs, 401(k) plans and government retirement plans are tax-free.
In Illinois, Social Security benefits are not taxed. However, you may owe federal taxes on a portion of your benefits based on your income. If you file an individual tax return and have a total income of $25,000 to $34,000, or file jointly as a couple and have a total income of $32,000 to $44,000, up to 50% of your benefits may be taxed. If your total income is over $34,000 for an individual or $44,000 as a couple, up to 85% of your benefits may be taxed by the federal government.
This all sounds like a mess, and it really is. That’s why it’s best to check with your accountant or financial advisor every year, before filling the tax forms and making the payments.
Understanding How Properties Are Taxed in Illinois
Your Illinois property tax bill is based on several factors, including your home’s assessed value and local tax rate. The state’s average property tax rate is 2.08%, the second-highest in the US (yeah, that quite a lot, nothing to do so far), with significant variations depending on your municipality. For example, Northeastern Illinois, including Chicago, generally has higher property taxes than the rest of the state. Homeowners can qualify for exemptions such as the general homestead and senior citizens homestead exemptions.
For more information on property tax relief, I must advise you to contact your county assessor or visit the state’s Department of Revenue’s website clicking here. Personal property, like boats, cars, and RVs, is not subject to Illinois taxation. I know, they are properties, but they are not real estate, and that’s the difference. A property that can be moved from one place to another, like your Chrysler Pacifica, will not be imposed with the real estate taxes.