Current through Register Vol. 48, No. 38, September 20, 2024
a) In calculating
base income, taxpayers are entitled to subtract an amount equal to all
amounts included in such total which are exempt from taxation by this State
either by reason of its statutes or Constitution or by reason of the
Constitution, treaties or statutes of the United States; provided that, in the
case of any statute of this State that exempts income derived from bonds or
other obligations from the tax imposed under this Act, the amount exempted
shall be the interest net of bond premium amortization (IITA
203(a)(2)(N)). There are also provisions of Illinois law that exempt the income
of certain obligations of state and local governments from Illinois income
taxation (see subsection (f)).
b)
Interest on obligations of the United States. A federal statute exempts stocks
and obligations of the United States Government, as well as the interest on the
obligations, from state income taxation (see
31 USC
3124(a)) .
1) "Obligations of the United States" are
those obligations issued "to secure credit to carry on the necessary functions
of government." Smith v. Davis (1944) 323 U.S. 111, 119, 89 L. Ed. 107, 113, 65
S. Ct. 157, 161. The exemption is aimed at protecting the "Borrowing" and
"Supremacy" clauses of the Constitution. Society for Savings v. Bowers (1955)
349 U.S. 143, 144, 99 L. Ed. 2d 950, 955, 75 S. Ct. 607, 608. Hibernia v. City
and County of San Francisco (1906) 200 U.S. 310, 313, 50 L. Ed. 495, 496, 26 S.
Ct. 265, 266.
A) Tax-exempt credit
instruments possess the following characteristics:
i) they are written documents;
ii) they bear interest;
iii) they are binding promises by the United
States to pay specified sums at specified dates;
iv) they have congressional authorization
which also pledges the faith and credit of the United States in support of the
promise to pay. Smith v. Davis, supra.
B) A governmental obligation that is
secondary, indirect, or contingent, such as a guaranty of a nongovernmental
obligor's primary obligation to pay the principal amount of and interest on a
note, is not an obligation of the type exempted under
31 USC Section
3124(a). Rockford Life Ins.
Co. v. Department of Revenue, 107 S. Ct. 2312 (1987).
2) Based on the above, the following types of
income are exempt under
31 USC Section
3124(a):
A) Interest on U.S. Treasury bonds, notes,
bills, certificates, and savings bonds.
B) Income from GSA Public Building Trust
Participation Certificates: First Series, Series A through E; Second Series,
Series F; Third Series, Series G; Fourth Series H and I.
c) Income exempted by reason of
other federal statutes. Federal statutes provide exemption from state income
taxation with respect to various specifically named types of income. Following
is a list (intended to be exhaustive) of exempt income and the specific
statutes to which each item relates:
1) Banks
for Cooperatives - Income from notes, debentures, and other obligations issued
by Banks for Cooperatives (
12 USC
2134) .
2) Commodity Credit Corporation - Interest
derived from bonds, notes, debentures, and other similar obligations issued by
Commodity Credit Corporation (
15
USC 713a-5) .
3) Farm Credit System Financial Assistance
Corporation (Financial Assistance Corporation) - Income from notes, bonds,
debentures, and other obligations issued by the Financial Assistance
Corporation ( 12 USC 2278b-10(b)).
4) Federal Deposit Insurance Corporation -
Interest derived from notes, debentures, bonds, or other such obligations
issued by Federal Deposit Insurance Corporation (
12
USC 1825) .
5) Federal Farm Credit Banks - Income from
consolidated system-wide notes, bonds, debentures, and other obligations issued
jointly and severally under
12
USC 2153 by Banks of the Federal Farm Credit
System (
12 USC
2023;
12 USC 207;
12 USC
2098; and
12 USC
2134).
6) Federal Home Loan Banks -
Interest derived from notes, debentures, bonds, and other such obligations
issued by Federal Home Loan Banks and from consolidated Federal Home Loan bonds
and debentures (
12
USC 1433) .
7) Federal Intermediate Credit Banks - Income
from notes, debentures, bonds, and other obligations issued by Federal
Intermediate Credit Banks ( 12 USC 2079).
8) Federal Land Banks and Federal Land Bank
Association - Income from notes, debentures, bonds, and other obligations
issued by Federal Land Banks and Federal Land Bank Associations ( 12 USC 2055
).
9) Federal Savings and Loan
Insurance Corporation - Interest derived from notes, bonds, debentures, and
other such obligations issued by Federal Savings and Loan Insurance Corporation
( 12 USC 1725(e)).
10) Financing
Corporation (FICO) - Income from obligations issued by the Financing
Corporation (
12 USC
1441(e)(8)) .
11) General Insurance Fund
A) Interest derived from debentures issued by
General Insurance Fund under the War Housing Insurance Law (
12 USC
1739(d)); or
B) Interest derived from debentures issued by
General Insurance Fund to acquire rental housing projects (
12
USC 1747g(g)); or
C) Interest derived from Armed Services
Housing Mortgage Insurance Debentures issued by the General Insurance Fund (
12 USC Section
1748b(f)) .
12) Guam - Interest derived from
bonds issued by the government of Guam (
48
USC 1423a) . This income is not presently
included in federal taxable income. Under Illinois law, it must be added back
to federal taxable income and then claimed as a subtraction on an Illinois
income tax return.
13) Mutual
Mortgage Insurance Fund - Income from such debentures as are issued in exchange
for property covered by mortgages insured after February 3, 1988 (
12 USC
1710(d)) . This income is
not presently included in federal taxable income. Under Illinois law, it must
be added back to federal taxable income and then claimed as a subtraction on an
Illinois income tax return.
14)
National Credit Union Administration Central Liquidity Facility - Income from
the notes, bonds, debentures, and other obligations issued on behalf of the
Central Liquidity Facility (
12 USC
1795K(b)) .
15) Production Credit Association - Income
from notes, debentures, and other obligations issued by Production Credit
Association (
12 USC
2098) .
16) Puerto Rico - Interest derived from bonds
issued by the Government of Puerto Rico (
48 USC 745) .
This income is not presently included in federal taxable income. Under Illinois
law, it must be added back to federal taxable income and then claimed as a
subtraction on an Illinois income tax return.
17) Railroad Retirement Act - Annuity and
supplemental annuity payments as qualified under the Railroad Retirement Act of
1974 (
45 USC
231m) . Please be sure to use the line
specified on your Illinois return for this item.
18) Railroad Unemployment Insurance Act -
Unemployment benefits paid pursuant to the Railroad Unemployment Insurance Act
(45
USC 352(e)) .
19) Resolution Funding Corporation - Interest
from obligations issued by the Resolution Funding Corporation (
12 USC
1441b(f)(7)(A)) .
20) Special Food Service Program - Assistance
to children under the Special Food Service Program (
42 USC
1760(e)) .
21) Student Loan Marketing Association -
Interest derived from obligations issued by the Student Loan Marketing
Association (
20 USC
1087-2(h)(221)) .
22) Tennessee Valley Authority - Interest
derived from bonds issued by the Tennessee Valley Authority (
16 USC
831n-4(d).
23) United States Postal Service - Interest
derived from obligations issued by the United States Postal Service (
39
USC 2005(d)(4)) .
24) Virgin Islands - Interest derived from
bonds issued by the Government of the Virgin Islands (
48 USC
1574(b)(ii)(A)) . This
income is not presently included in income taxable federally. Under Illinois
law, it must be added back to federal taxable income and then claimed as a
subtraction on an Illinois income tax return.
25) American Samoa - Interest on bonds issued
by the Government of American Samoa (
48 USC
1670(b)) .
26) Northern Mariana Islands - Interest on
bonds issued by the Government of the Northern Mariana Islands (
48
USC 1801 note).
d) Distributions from money market trusts
(mutual funds). Taxpayers may subtract income received from any of the
obligations listed in subsections (b) and (c), even if the obligations are
owned indirectly through owning shares in a mutual fund.
1) If the fund invests exclusively in these
state tax exempt obligations, the entire amount of the distribution (income)
from the fund may be subtracted.
2)
If the fund invests in both exempt and non-exempt obligations, the amount
represented by the percentage of the distribution that the mutual fund
identifies as exempt may be subtracted.
3) If the mutual fund does not identify an
exempt amount or percentage, taxpayers may figure the subtraction by
multiplying the distribution by the following fraction: as the numerator, the
amount invested by the fund in state-exempt U.S. obligations; as the
denominator, the fund's total investment. Use the year-end amounts to figure
the fraction if the percentage ratio has remained constant throughout the year.
If the percentage ratio has not remained constant, take the average of the
ratios from the fund's quarterly financial reports.
e) Getting a refund of tax you already paid.
If you paid Illinois income tax on these state tax exempt distributions, you
may file an amended return to claim a refund for any year still within the
statute of limitations.
f) Interest
on obligations of state and local governments. Income from state and local
obligations is not exempt from Illinois income tax except where authorizing
legislation adopted after August 1, 1969, specifically provides for an
exemption. To date, authorizing legislation provides exemption for the income
from the securities listed below. Taxpayers must show income from these exempt
bonds as an addition and then as a subtraction on the Illinois income tax
return. Income from these bonds is not exempt if the bonds are owned indirectly
through owning shares in a mutual fund.
1)
Notes and bonds issued by the Illinois Housing Development Authority (except
housing-related commercial facilities notes and bonds) [
20 ILCS
3805/31] .
2) Bonds authorized pursuant to the Export
Development Act of 1983 (former Ill. Rev. Stat. 1991, ch. 127, par. 2513,
repealed by P.A. 87-860, effective July 1, 1992).
3) Bonds issued by the Illinois Development
Finance Authority pursuant to Sections 7.50 through 7.61 (venture fund and
infrastructure bonds) [ 20 ILCS 3505/7.61 ], (repealed by P.A. 93-205,
effective January 1, 2004, which provides in
20 ILCS 3501/845-60
that bonds issued under this provision continue to be exempt from
taxation).
4) Bonds and notes
issued by the Quad Cities Regional Economic Development Authority, if the
Authority so determines [
70 ILCS 510/11 and
13 and 70 ILCS 515/11 and 12].
5)
College Savings Bonds issued under the General Obligation Bond Act in
accordance with the Baccalaureate Savings Act [
110 ILCS
920/7] .
6) Bonds issued by the Illinois Sports
Facilities Authority [
70 ILCS 3205/15
].
7) Bonds issued on or after
September 2, 1988, pursuant to the Higher Education Student Assistance Act [
110 ILCS
947/145] (transferred from 105 ILCS 5/30-15.18 by
P.A. 87-997).
8) Bonds issued by
the Illinois Development Finance Authority or the Illinois Finance Authority
under the Asbestos Abatement Finance Act [
20 ILCS 3510/8
].
9) Bonds and notes issued under
the Rural Bond Bank Act [
30 ILCS 360/3-12]
(repealed by P.A. 93-205, effective January 1, 2004, which provides in
20 ILCS 3501/845-60
that bonds issued under this provision continue to be exempt from
taxation).
10) Bonds issued
pursuant to Sections 7.80 through 7.87 of the Illinois Development Finance
Authority Act [ 20 ILCS 3505/7-86 ] (repealed by P.A. 93-205, effective January
1, 2004, which provides in
20 ILCS 3501/845-60
that bonds issued under this provision continue to be exempt from
taxation).
11) Bonds issued by the
Quad Cities Interstate Metropolitan Authority under the Quad Cities Interstate
Metropolitan Authority Act [
45 ILCS
35/110] .
12) Bonds issued by the Southwestern Illinois
Development Authority pursuant to the Southwestern Illinois Development
Authority Act [
70 ILCS
520/7.5] .
13) Bonds issued by the Illinois Finance
Authority under the Local Government Article and the Financially Distressed
City Program in the Illinois Finance Authority Act [
20 ILCS 3501/820-60
and 825 -55].
14) Illinois Power
Agency bonds issued by the Illinois Finance Authority under the Other Powers
Article of the Illinois Finance Authority Act [
20 ILCS
3501/825-90] , if the Authority so
determines.
15) Bonds issued by the
Central Illinois Economic Development Authority under the Central Illinois
Economic Development Authority Act [
70 ILCS
504/40] , if the Authority so determines.
16) Bonds issued by the Eastern Illinois
Economic Development Authority under the Eastern Illinois Economic Development
Authority Act [
70 ILCS
506/40] , if the Authority so determines.
17) Bonds issued by the Southeastern Illinois
Economic Development Authority under the Southeastern Illinois Economic
Development Authority Act [
70 ILCS
518/40] , if the Authority so determines.
18) Bonds issued by the Southern Illinois
Economic Development Authority under the Southern Illinois Economic Development
Authority Act [
70 ILCS
519/5-45] , if the Authority so determines.
19) Bonds issued by the Upper Illinois River
Valley Development Authority under the Upper Illinois River Valley Development
Authority Act [
70 ILCS
530/7.1] , if the Authority so determines.
20) Bonds issued by the Illinois Urban
Development Authority under the Illinois Urban Development Authority Act [
70 ILCS 531/11] ,
if the Authority so determines.
21)
Bonds issued by the Western Illinois Economic Development Authority under the
Western Illinois Economic Development Authority Act [
70 ILCS
532/45] , if the Authority so determines.
22) Bonds issued by the Downstate Illinois
Sports Facilities Authority under the Downstate Illinois Sports Facilities
Authority Act [
70 ILCS 3210/60] ,
if the Authority so determines.
23)
Bonds issued by the Will-Kankakee Regional Development Authority under the
Will-Kankakee Regional Development Authority Law [
70 ILCS
535/14] , if the Authority so determines.
24) Bonds issued by the Tri-County River
Valley Development Authority under the Tri-County River Valley Development
Authority Law [
70 ILCS
525/2007.1] , if the Authority so
determines.
25) Bonds issued by the
New Harmony Bridge Authority under the New Harmony Bridge Authority Act [
45 ILCS 185/5-50] . This
exemption is subject to sunset under IITA Section 250, and does not apply to
taxable years beginning on or after August 19, 2023, the fifth anniversary of
the effective date of P.A. 100-981.
26) Bonds issued by the New Harmony Bridge
Bi-State Commission under the New Harmony Bridge Interstate Compact Act [
45 ILCS
190/10-5] . This exemption is subject to sunset under
IITA Section 250, and does not apply to taxable years beginning on or after
August 19, 2023, the fifth anniversary of the effective date of P.A.
100-981.
g) Other income
exempt from Illinois income taxation by reason of Illinois statute:
1) Income earned by certain trust accounts
established under the Illinois Pre-Need Cemetery Sales Act [
815
ILCS 390/16] or the Illinois Funeral or Burial Funds
Act [
225 ILCS
45/4a(c)] . Section 16(f) of the
Illinois Pre-Need Cemetery Sales Act and Section 4a(c) of the Illinois Funeral
or Burial Funds Act provide that: because it is not known at the time
of deposit or at the time that income is earned on the trust account to whom
the principal and the accumulated earnings will be distributed, for purposes of
determining the Illinois Income Tax due on these trust funds, the principal and
any accrued earnings or losses relating to each individual account shall be
held in suspense until the final determination is made as to whom the account
shall be paid.
2) Income
in the form of education loan repayments made for health care providers who
agree to practice in designated shortage areas for a specified period of time
under the terms of the Family Practice Residency Act [
110 ILCS
935/4.10] .
3) Income earned by nuclear decommissioning
trusts established pursuant to Section 8-508.1 of the Public Utilities Act [
220 ILCS
5/8-508.1]. The terms "Decommissioning trust"
or "trust" means a fiduciary account in a bank or other financial institution
established to hold the decommissioning funds provided pursuant to
Section 8-508.1(b)(2) of the Public Utilities Act for the eventual
purpose of paying decommissioning costs, which shall be separate from all other
accounts and assets of the public utility establishing the trust. [
220 ILCS
5/8-508.1(a)(3)]
4) Income from the Illinois prepaid tuition
program, other than disbursements to beneficiaries which are not used in
accordance with the applicable prepaid tuition contract under the Illinois
Prepaid Tuition Act [ 110 ILCS 979 ]. The Illinois prepaid tuition program was
created in 1997 for the express purpose of allowing savings for higher
education to earn tax-exempt returns under IRC section 529. If a prepaid
tuition contract qualifies under IRC section 529, earnings on contributions
made to the Illinois Prepaid Tuition Trust Fund under the contract are exempt
from federal income taxation (and therefore Illinois income taxation) until
distributed. The legislative intent in creating the Illinois prepaid tuition
program does not guarantee that every prepaid tuition contract will qualify
under IRC section 529 and there is no guarantee that IRC section 529 will
continue in effect. However, Section 55 of the Illinois Prepaid Tuition Act [
110 ILCS 979/55]
provides that assets of the Illinois Prepaid Tuition Trust Fund and its
income and operation shall be exempt from all taxation by the State
and that disbursements to a beneficiary shall be similarly exempt from
all taxation by the State of Illinois and any of its subdivisions, so long as
they are used for educational purposes in accordance with the provisions of an
Illinois prepaid tuition contract. Under this provision, any
undistributed earnings of the Illinois Prepaid Tuition Trust which are included
in a taxpayer's federal taxable income or adjusted gross income because a
prepaid tuition contract does not qualify under IRC section 529 may be
subtracted in computing the taxpayer's base income, and all disbursements
included in a beneficiary's adjusted gross income may be subtracted to the
extent used in accordance with the Illinois prepaid tuition contract under
which the disbursements are made, regardless of whether the prepaid tuition
contract qualifies under IRC section 529.
5) Income from the College Savings Pool,
other than disbursements to beneficiaries that are not used to pay qualified
expenses under the State Treasurer Act [
15 ILCS
505/16.5] . Under the State Treasurer Act,
distributions from the College Savings Pool must generally be used for
qualified expenses, which are defined to mean tuition,
fees, and the costs of books, supplies, and equipment required for enrollment
or attendance at an eligible educational institution and certain room and board
expenses. Distributions made for qualified expenses must be made
directly to the eligible educational institution, directly to a vendor,
or in the form of a check payable to both the beneficiary and the institution
or vendor. The College Savings Pool was created in PA 91-607 for the
express purpose of allowing savings for higher education to earn tax-exempt
returns under IRC section 529. If an investment in the College Savings Pool
qualifies under IRC section 529, earnings on that investment are exempt from
federal income taxation (and therefore Illinois income taxation) until
distributed. The legislative intent in creating the College Savings Pool does
not guarantee that investments will qualify under IRC section 529 and there is
no guarantee that IRC section 529 will continue in effect. However, the State
Treasurer Act [
15 ILCS
505/16.5] , as amended in PA 91-829, provides that
assets of the College Savings Pool and its income and operation shall
be exempt from all taxation by the State and that disbursements to a
beneficiary shall be similarly exempt from all taxation by the State of
Illinois and any of its subdivisions, so long as they are used for qualified
expenses. Under this provision, any undistributed earnings of the
College Savings Pool that are included in a taxpayer's federal taxable income
or adjusted gross income because a College Savings Pool investment does not
qualify under IRC section 529 may be subtracted in computing the taxpayer's
base income, and all disbursements included in a beneficiary's adjusted gross
income may be subtracted to the extent used to pay qualified expenses,
regardless of whether the College Savings Pool investment qualifies under IRC
section 529.
6) Income earned on
investments made pursuant to the Home Ownership Made Easy Program [
310 ILCS 55/5.1
].
7) Up to $2,000 of income
derived by individuals from investments made in accordance with College Savings
Programs established under Section 75 of the Higher Education Student
Assistance Act [
110 ILCS 947/75] .
This subtraction is allowed only for taxable years ending prior to August 9,
2013, the effective date of PA 98-0251, which repealed Section 75 of the Higher
Education Student Assistance Act.
h) Income not exempt from Illinois income
taxation. The following types of income are not exempt from Illinois income
taxation:
1) Income from securities commonly
known as GNMA "Pass-Through Securities" and also known as GNMA "Mortgage-Backed
Securities" issued by approved issuers under
12
USC 1721(g) and guaranteed
by GNMA under 12 USCA 1721(g) (Rockford Life Insurance Co. v. Department of
Revenue, 112 Ill.2d 174, 492 N.E. 2d 1278 (1986), reh. den. June 2, 1986) and
income from debentures, notes, and bonds issued by the Federal National
Mortgage Association including mortgage-backed bonds issued under authority of
12 USCA 1719(d) and guaranteed by GNMA under
12
USC 1721(g).
2) Accumulated interest on Internal Revenue
Service tax refunds. Illinois Department of Revenue Letter Ruling No. 86-0640,
dated July 11, 1986, citing Glidden Co. v. Glander, 151 Ohio St. 344, 86 N.E.
2d 1, 9 A.L.R. 2d 515 (1949).
3)
Income from U.S. securities acquired by a taxpayer under a repurchase agreement
("repo") with a bank or similar financial organization. The Department takes
the position that, for income tax purposes, such agreements are generally to be
treated as loans. That is, the taxpayer "loans" money to the bank and receives
interest in return. The securities subject to repurchase by the bank serve as
collateral for the loan. The bank remains legally entitled to receive the
interest payments from the issuing authority and remains the actual owner of
the securities. Therefore, any tax benefit attributable to the "exempt" income
paid by the issuing authority accrues to the bank and not to the
investor.
4) Section 514(a) of the
Employee Retirement Income Security Act of 1974 (ERISA,
29
USC 1144(a)) does not
preempt the taxation of unrelated business income of an Employee Benefit Plan
governed by ERISA. Buono v. NYSA-ILA Medical and Clinical Services Fund, 520
U.S. 806, 808 (1997). Taxpayers that relied upon the Department's letter
rulings IT 90-0073, IT 93-0017 and IT 93-0187, prior to July 1, 2002, shall not
incur liability for taxes or penalties pursuant to Section 4(c) of the
Taxpayers' Bill of Rights Act [ 20 ILCS 2520 ].
i) Method for computing the subtraction of
exempt income. The Department emphasizes that before a taxpayer may subtract an
item of exempt income, the taxpayer must be sure that he or she has included
the item in Illinois income. Some tax-exempt items are "automatically" included
in base income because they are included in federal adjusted gross income,
which is a part of base income. Interest on U.S. Treasury notes is in this
category. Other exempt items must be included as an addition on the Illinois
tax return in figuring base income. In other words, the taxpayer must list
certain tax-exempt items as additions and then as subtractions in figuring base
income. Interest on the state and local government bonds described in
subsection (f) is in this category.