The saying goes, “Nothing in life is for certain besides dying and taxes.” However there’s extra beneath the hood than what that quote’s creator spoke about. The property tax is only one of many various taxes on the market, and there are variations between the federal property tax and the property tax at a state degree. The federal property tax grabs the headlines extra usually – will adjustments be coming in 2025? – but it surely’s on the state degree the place many extra households may be impacted. I’ve written in regards to the federal property tax and methods in a couple of different locations right here on the Mission Wealth Insights weblog (for background on the federal property tax, test this article out!). Nonetheless, this text will look extra deeply at one of many 13 states/territories with an property tax on the state degree – Illinois.
The Illinois Property Tax – Variations from the Federal Property Tax
Like each different state with an property tax, Illinois has a a lot decrease threshold for when an property might owe property taxes. In Illinois, this threshold is $4,000,000 per particular person. It’s essential to notice that the brink is simply that in Illinois – if an Illinois resident passes away with $3,999,999.99 to their identify, they owe no property taxes. If that very same particular person discovered a penny and their property was now equal to the Illinois threshold, then their complete property is now checked out for tax functions.
That is completely different than on the federal degree, the place we obtain a credit score to make use of towards our property in order that we’re solely paying taxes in impact on all the things over the $13,610,000 federal property tax credit score exemption. In Illinois, the Legal professional Basic has particularly acknowledged that the $4,000,000 exclusion “is a taxable threshold and never a credit score towards tax.” That one penny considerably impacts the ultimate taxes owed by that particular person’s property.
Illinois has 21 completely different tax brackets for its property tax. The bottom price is 0%, and the very best is 16%. The chart beneath outlines the completely different brackets.
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Illinois Property Tax Charges |
||
|
Property Worth |
Marginal Fee |
Base Taxes Paid |
|
$1 – $40,000 |
0% |
$0 |
|
$40,000 – $90,000 |
0.8% |
$0 |
|
$90,000 – $140,000 |
1.6% |
$400 |
|
$140,000 – $240,000 |
2.4% |
$1,200 |
|
$240,000 – $440,000 |
3.2% |
$3,600 |
|
$440,000 – $640,000 |
4.0% |
$10,000 |
|
$640,000 – $840,000 |
4.8% |
$18,000 |
|
$840,000 – $1.04 million |
5.6% |
$27,600 |
|
$1.04 million – $1.54 million |
6.4% |
$38,800 |
|
$1.54 million – $2.04 million |
7.2% |
$70,800 |
|
$2.04 million – $2.54 million |
8.0% |
$106,800 |
|
$2.54 million – $3.04 million |
8.8% |
$146,800 |
|
$3.04 million – $3.54 million |
9.6% |
$190,800 |
|
$3.54 million – $4.04 million |
10.4% |
$238,800 |
|
$4.04 million – $5.04 million |
11.2% |
$290,800 |
|
$5.04 million – $6.04 million |
12.0% |
$402,800 |
|
$6.04 million – $7.04 million |
12.8% |
$522,800 |
|
$7.04 million – $8.04 million |
13.6% |
$650,800 |
|
$8.04 million – $9.04 million |
14.4% |
$786,800 |
|
$9.04 million – $10.04 million |
15.2% |
$903,800 |
|
$10.04 million and up |
16.0% |
$1,082,800 |
Illinois additionally differs from the federal property tax in that the $4,000,000 threshold shouldn’t be a determine that may be mixed with the surviving partner’s threshold. In Illinois, identical to on the federal degree, one partner can switch property to the surviving partner with out triggering any property tax issues – that is known as the “limitless marital deduction.” Nevertheless, one other key distinction comes into play: on the federal degree, the place one partner has an extra or unused exemption, the surviving partner can file for “portability” and mix it with their very own. In Illinois, you’ll be able to’t. It’s a use-it or lose-it supply.
Planning Methods for the Illinois Property Tax
There are a number of methods to successfully plan for the Illinois property tax and restrict your potential future tax legal responsibility.
- Threshold/Exemption Planning with Trusts
As beforehand talked about, not like the federal property tax exemption, the Illinois threshold shouldn’t be a combinable tax credit score. Which means that for a married couple, the design of your property plan must be completely different to successfully use every of your potential $4,000,000 thresholds.For instance, say that Bob and Marcia dwell in Illinois and have all their life. They’ve 2 grownup youngsters whom they want to depart their property. Bob and Marcia have labored arduous, lived inside their means, and made good funding choices with their wealth administration workforce. Their whole internet value is $6,000,000, and so they’ve been accountable of their property planning. Their property plan leaves all of their property to the surviving partner at first dying and the stability to their children equally as soon as they’ve each handed. Nevertheless, this plan has a hidden hazard because it doesn’t embody establishing a Credit score Shelter Belief on the first partner’s dying.
As soon as Bob passes away, his property is run because the plan outlines, and all the things continues in Marcia’s identify. As a result of Bob left all the things to his partner, no property tax has been triggered in Illinois. Someday later, Marcia passes away. As a result of Marcia’s property is valued at $6,000,000, all the things is taken into account for property tax functions. Based on the Illinois Legal professional Basic’s property tax calculator, Marcia’s property would owe $456,071 in taxes. The remaining $5,543,929 was transferred to her youngsters.
With extra planning, Bob and Marcia might have probably prevented all of the state-level taxes. The outcomes look completely different if their plan known as for a Credit score Shelter Belief to be funded on the first dying. At Bob’s dying, $3,000,000 would go into this irrevocable belief for Marcia’s profit. Marcia might proceed to make use of the property as she wanted. This additionally would cut back Marcia’s internet value to $3,000,000. Then, at Marcia’s dying, no tax could be due as she is beneath the brink for her property being taxable. The opposite profit to this planning is that any appreciation contained in the belief is sheltered from the property tax.
It’s essential to notice that cautious planning consists of being conscious of beneficiary designations on accounts. Beneficiary designations can enable for a smoother transition of property at dying however can even undo any cautious threshold planning finished in revocable trusts. Beneficiary designated override something in a Belief or Will, so even when your plan requires establishing a Credit score Shelter Belief on the first dying, the beneficiary-designated property is not going to get picked up by that cautious planning.
- Gifting
Illinois doesn’t have a present tax. Nevertheless, the federal present limits nonetheless apply. At present, the annual exclusion on the federal degree is $18,000 per recipient. In the event you give somebody greater than that, you need to file a present tax return.For each greenback you present over the federal exclusion quantity, your Illinois threshold is diminished by that very same quantity. In the event you give $200,000 in overages in your lifetime, your Illinois threshold is diminished by $200,000. Illinois additionally consists of any items made within the final three years of a lifetime. With cautious planning, gifting can drastically scale back your property and the potential tax legal responsibility over time.
- Altering Residence
It’s simpler stated than finished, however an alternative choice could be to maneuver from Illinois to certainly one of many states that would not have an property tax. This consists of Wisconsin, Michigan, Indiana, Ohio, and Missouri within the Midwest. Iowa has an inheritance tax that’s at the moment being phased out. You will need to notice that Illinois doesn’t hand over its declare to you when you merely depart the state for greater than half the yr annually. Illinois makes use of a information and circumstances take a look at to find out if somebody is a resident of the state and, subsequently, topic to property taxes. Additionally essential to notice is that when you keep property in Illinois, most continuously within the type of actual property, Illinois has particular guidelines round non-residents and the way the property taxes might apply. Suppose you keep property over the $4,000,000 threshold in Illinois. In that case, you’ll owe property taxes in proportion to the worth of your property in Illinois and the overall worth of your property. - Charitable Giving
Charitable giving is one other efficient technique to scale back your potential Illinois property tax. Like gifting, you can provide to charity throughout your life and scale back your property. There aren’t any limits to charitable giving past what you’ll be able to successfully deduct in your earnings tax return and what your monetary plan can help. At dying, any charitable bequests produce a dollar-for-dollar offset to your property.
Illinois Outlook
Illinois residents should take into consideration how their wealth plan is ready up, not simply throughout their lifetime however past. Many households have a tendency to not need the Illinois Division of Income concerned as a charitable beneficiary on their property. With the correct amount of property and tax planning, steps may be taken to restrict or eradicate potential property tax burdens sooner or later.
As of this writing, there’s laws within the Illinois legislature to vary property tax guidelines, specifically, to vary the brink to a real credit score, enhance the quantity to $6,000,000 per particular person, and permit the credit score to be mixed between spouses. There are additionally extra guidelines to assist shield farmers, so household farms should not required to be offered when the farm adjustments arms between generations.
At Mission Wealth, we’ll proceed to observe these proposed adjustments and their potential impacts on our shoppers. You probably have any questions, please contact our wealth advisory and technique workforce at the moment.
This text shouldn’t be supposed to supply any particular tax or property planning recommendation. Advisory companies are solely provided to shoppers or potential shoppers the place Mission Wealth and its representatives are correctly licensed or exempt from licensure. Seek the advice of a tax skilled or legal professional for particular recommendation.
