Illinois State Taxation & Reporting of Foreign Income

Do I Have to Pay Illinois State Taxes on Foreign Income?  

Illinois Department of Revenue Can be a Nightmare when proving domicile

If you have a federal return with an IL address and did not file an IL tax return, expect an audit letter from the State.

Thankfully they allow the foreign earned income exclusion however, if you take the foreign tax credit in lieu of the FEIE, you will be subject to state taxation if you are considered domiciled in Illinois, as the Federal AGI is calculated before the application of the tax credit. The Federal AGI is the State of Illinois's starting point for calculating the state return.

I have had several cases where ex-pats did not file an Illinois return but later found out due to the State and the IRS sharing data with each other through a “variety of ongoing initiatives.” Even non-expats who change their residency to another state and filed a previous year’s IRS return that did not file but used their old IL address on the return should be expected to be audited by the State.

Residency in the Illinois Income Tax Act

Residency Defined

Illinois imposes income tax on every individual who is a resident of this State.[1] An individual is an Illinois resident if (1) they are in Illinois for other than a temporary or transitory purpose during the taxable year or (2) they are domiciled in Illinois but are absent for a temporary or transitory purpose during the taxable year.

First, an Illinois resident is someone in this state for other than a temporary or transitory purpose. Obviously, a vacationer or businessperson staying in Illinois for a week is not a resident – they are only here temporarily. For a stay NOT to be temporary or transitory, a longer, indefinite period is required, likely coupled with no definite intention to leave Illinois. Those persons will be considered residents of Illinois.

Second, an Illinois resident is ‘domiciled’ in this State, and only absent for a temporary or transitory purpose. The Illinois Administrative Code defines domicile as, "the place where an individual has his or her true, fixed, permanent home … the place to which he or she intends to return wherever absent."[3] It should be noted you can only have one domicile at a time. Of course, in our transient society, domicile is not as clear as it used to be. There are a number of ‘snowbirds’ from Illinois that spend a good deal of the winter in another state – which they may even call ‘home.’ For these snowbirds to claim they are domiciled in another state will require looking at the facts and circumstances of each case.

When you are ready to have your return prepared please send me an email to get the process started. 

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