Why Do I Owe So Much To Illinois For 2011?

There are many people who live in Illinois and work in Missouri, I am one of them. I have had a lot of friends inquiring why they owe so much to Illinois this year in comparison to 2010. It is not an error of the tax preparation, but in fact, their actual liability.

For tax year 2011 Illinois raised the individual tax rate from 3% to 5%, which is still less than Missouri’s rate of 6%. Wouldn’t this mean that you are still paying more taxes to Missouri? The answer is no.

In calculating the tax for both states you start with your federal adjusted gross income, and then you figure the state additions and subtractions. These are typically not too significant on most tax returns. The main difference between Illinois and Missouri are the state deductions. Let’s assume you are filing as a single taxpayer, the numbers change if you are married or claiming a dependent. In Illinois you simply have your exemption, which is $2,000. In Missouri you receive a $2,100 exemption, up to a $5,000 reduction for federal taxes paid, and either a standard deduction of $5,800 or itemized deductions (similar to federal). In turn, in Illinois you are being taxed on 5% of your federal adjusted gross income less $2,000. In Missouri you are being taxed 6% on your federal adjusted gross income less a potential $12,900 in deductions.

This was not a significant problem in the past due to the difference in the tax rates. Illinois employers were able to adjust the withholding for the new tax rates, but Missouri employers calculate the state withholding based on Missouri tax deductions. The Missouri withholding should cover the Missouri tax due, but the Illinois credit for taxes paid to other states is not sufficient enough to cover the Illinois liability. This is why you may have a liability for 2011. The only ways to fix this for 2012 are:

  1. Have your employer withhold additional taxes for Illinois
  2. You make estimated tax payments to Illinois (which may be mandatory for 2012 if your liability exceeded $500 for 2011)

There is an upside if you work in the city and you have St. Louis City withholding. The amount of your withholding is also included in the calculation for your Illinois credit for taxes paid to other states, so this will reduce your Illinois tax liability.

The tax codes are complicated and differ drastically from state to state. This is one example of how the difference between the marginal tax rate and the effective tax rate can significantly impact taxpayers.