Want a Second Home to Avoid Illinois Income Tax?

Taxes and the cold drive people out of IL to warmer and zero income tax states. Read what’s up with IL income tax and how to keep a home in IL and another state.

If you are over age 50 and especially if you’re an empty nester (like me) then it’s probably crossed your mind to get out of dodge. IL has the 2nd highest property taxes in the US. One case where being highly ranked stinks. State income taxes have also gone from 3% to 4.95% in the last few years. What’s coming could be a whole lot worse is the state is in the red in a massive way! Our new Governor Pritzker wants to tax income more than ever before. Unfortunately, when you raise price or tax something more, you generally get smaller less of it as people will obviously try to avoid this extra cost. In this case, one option is to move out of IL.  More on this later in this post.

Why should IL residents expect the worst from tax policy?

On the November ballot is an IL constitutional law change that if passed would allow for IL to change from a flat income tax to a progressive tax. A progressive tax means the more you earn the higher tax rate you pay. With the fair, flat tax, everybody pays the same rate and the more you earn, the higher your tax bill will be. If progressive tax is passed on November ballot, there will be no way to block future tax rate increases. Both bodies of IL Congress and the Governor are likely to want to attempt to tax their way out of state debt.

That being said, let’s look at the proposal, bearing in mind that the current Illinois personal income tax rate is 4.95% for all income above a personal exemption of $2,000.

Income up to $10,000 (27.2% of taxpayers) – 4.75%

Marginal rate up to $100,000 (58.9% of taxpayers) – 4.90%

Marginal rate up to $250,000 (11.1%) – 4.95%

Marginal rate up to $500,000 (1.9%) – 7.75%

Marginal rate up to $1,000,000 (0.6%) – 7.85%

Total rate for taxpayers with income above $1,000,000 – 7.95%.

So what do you notice?

In the first place, the incessant promises of “tax cuts for the middle class” may be literally true insofar as 4.90% is 0.05 percentage-points less than 4.95%. Those making over $250k will see there tax rates going from 4.95% to 7.95%. That’s a 60% increase!   Will it even make a dent?

How bad is the IL financial problem?

According to Mercatus: On the basis of its solvency in five separate categories, Illinois ranks 50th among the US states for fiscal health.

TYPES OF RETIREMENT DEBT

State: $152.6 billion

• State pensions: $82.9 billion (note: this is the only type included in the $83 billion figure)
• State pension bonds: $15.5 billion
• State retiree health benefits: $54.2 billion

Local: $50.8 billion

• Local pensions: $38.2 billion
• Local pension and benefit bonds: $1.9 billion
• Local retiree health benefits: $10.7 billion

This is the first report to give a complete picture of Illinois’ total retirement debt. All told, state and local governments in Illinois owe more than $203 billion for pensions and retiree health insurance. This is more than $41,000 in retirement debt for every Illinois household. From Illinois Policy

As you can see from the chart above, pensions that need to be funded are the biggest expense for the state government. How do these pensions work? Teachers at retirement, for example, are promised a percentage of pay (maybe average of past 5 years income) as young as age 55 and dependent on their years of service.

They get this pension income every year and it typically grows with inflation. What most people don’t appreciate how valuable these pensions really are and therefore, how much money has to be contributed by the government (out tax dollars) to fund them.

Would you rather receive a check for $1,000,000 or a receive a lifetime pension income of $75,000 with 2% inflation. If your life expectancy was 25 years and the present value of the annual income is actually over $1.4 million! The state would save billions in tax payer dollars if it simple gave career teachers a check for $1,000,000 rather than the fat pensions they receive.

Career teachers are extremely well taken care of in retirement!

Behind the scenes, the government has to make pension contributions and grow the money sufficiently in order to afford the pension income promises they have made to their employee. When you read that a pension is “underfunded” it means it’s that far behind what the account needs to have to fulfill the contractual promises made to the government employees.

When this happens in the private sector, if it can’t be solved the company eventual may collapse under the with of the money it has to spend funding the pensions promised. United Airlines is an example of a company that collapsed, went bankrupt (Court approves termination of United Airlines pension plans) when they could no longer stay solvent, in part, because of the burden on making pension contributions.

State’s can’t declare bankruptcy, but cities (Detroit) can. Without that option for IL, politicians want to try and tax their way to prosperity. This is a great read about Govenor Pritzker’s plan from Jane the Actuary. It doesn’t leave me feeling optimistic.

HOW HARD IS IT TO HAVE DUAL RESIDENCY AND AVOID IL INCOME TAX?

Help! How Do I Get the *#!% Out of Illinois?! (Changing Illinois Domicile to Florida) by By Kenneth W. Clingen I’ll quote from this article below:

For an Illinois resident moving to Florida who continues to reside in Illinois for part of the year, the focus will be on whether the individual is “domiciled” in Illinois. Illinois Department of Revenue Regulations define “domicile” as follows: 

Domicile has been defined as the place where an individual has his or her true, fixed, permanent home and principal establishment, the place to which he or she intends to return whenever absent. It is the place in which an individual has voluntarily fixed the habitation of himself or herself and family, not for a mere special or limited purpose, but with the present intention of making a permanent home, until some unexpected event shall occur to induce adoption of some other permanent home.

Another definition of “domicile” consistent with this is the place where an individual has fixed his or her habitation and has a permanent residence without any present intention of permanently moving. An individual can at any one time have but one domicile. If an individual has acquired a domicile at one place, he or she retains that domicile until he or she acquires another elsewhere.⁷

The Regulations do not provide a bright line test for determining whether an Illinois resident has changed his or her domicile. Phrases like “present intention” and “permanently moving” are fact-specific and invite litigation. Illinois courts have provided some clarity on the issue of domicile. 

Prudent Steps to Follow to Support Change of Domicile
The First few steps are critical: creating documentary evidence to establish Florida domicile. These steps include the following: 

• Purchasing or leasing a residence in Florida, using the new Florida address in the related deed or lease, and obtaining insurance in Florida on the residence or the property contained in the residence. 
  
  
• Informing the U.S. Postal Service, credit card companies, phone company, banks and financial institutions, physicians, social, civic, and religious organizations, family and friends of the change in address. 
  
  
• Applying for the Florida Homestead Real Property Tax Exemption using the address of the new residence. Note also that the Illinois homestead must be relinquished.
  
  
• Signing and filing in the local court as soon as possible a Declaration of Domicile for Florida, which is an affidavit stating that one’s new domicile is Florida. Note that this is a Florida statutory requirement for establishing Florida domicile.¹⁷

• Obtaining a Florida driver’s license and register motor vehicles and boats in Florida with Florida insurance.
  
  
• Registering to vote in Florida.

• Executing updated estate planning documents, such as wills, trusts, powers of attorney, and advance medical directives, stating a Florida domicile and using the Florida address in any other legal documents. 
  
  
• Using the Florida address in all federal documents such as passports, tax returns and tax related information documents, and Medicare and Social Security.
  
  
• Filing tax returns in the appropriate national office for a Florida resident (for income tax returns currently this would be Austin, Texas, or Charlotte, North Carolina, depending on payment). 
  
  
• Keeping a contemporaneous log of daily whereabouts, including maintaining airline tickets showing arrival into Florida and departure from Florida. 

Documenting Abandonment of Illinois Domicile
While the affirmative steps establishing Florida domicile are critical, equally important are the steps the individual should take showing he or she has abandoned Illinois domicile. These include principally the below: 

• Informing Illinois of relinquishment of old domicile by providing appropriate state agencies, such as the state taxing authorities, with the Declaration of Domicile for Florida. 
  
  
• Returning Illinois driver’s license and, if possible, assuring that any motor vehicles or boats are no longer registered in Illinois. 
  
  
• Renouncing the right to vote in Illinois (nor voting via absentee ballot). 
  
  
• Abstaining from using an Illinois address in legal documents. 
  
  
• Filing Illinois nonresident tax returns using Florida address.

Changing to Florida Domicile as the Center of Affairs
Perhaps the most challenging aspect of becoming a Florida resident is changing the center of affairs from Illinois to Florida. This is also an area that will trip up many taxpayers even if they have followed the other procedural requirements outlined above because they may not be able to comply with these best practices without disrupting family or social ties. A list of the primary steps that individuals should take are as follows: 

Home
First and most obvious spend as much time as possible in the Florida home – at least six months. Reside in the Florida home. 

Family
Have holidays with family at the Florida home. The more family activities in Florida with Florida residents in the family, the stronger the indicator that Florida is one’s domicile. Purchase a burial plot in Florida. 

Property
Move as much property as possible to Florida, especially property that may be considered near and dear to one’s heart, and secure a Florida safe deposit box to store valuable items and important documents. Open bank and financial accounts in Florida. 

Social
Join social clubs in Florida and be active in those clubs. Maintain friends in Florida. Purchase memberships or season tickets to theaters, sports teams, museums, and other local performance-related activities in Florida.

Civic
Vote in Florida, in person. Donate to political campaigns for Florida’s state and local offices. Attend and donate to religious organizations in Florida. Volunteer with Florida organizations and charities, and donate to them. 

Healthcare
Obtain a healthcare provider in Florida. 

Business
If still actively working, work as much time as possible in Florida. Establish a principal place of business in Florida.

I hope after reading this you’ll have a much better understanding about how this is done. Retirees form Illinois have been skipping town to avoid the crazy high and rising taxes. Prepare appropriately if you want to have a home in Illinois and somewhere else for tax purposes.

It would be a lot easier to simple move out of Illinois altogether from a tax perspective.