Illinois retiree taxes are favorable compared to retiree taxes in most states. Retirees in Illinois are not assessed a tax on any kind of retirement income. Illinois exempts nearly all retirement income from taxation, including Social Security retirement benefits, pension income and income from retirement savings accounts. Illinois is the only state in the midwest that completely exempts 401(k), IRA and pension income from tax. Illinois is one of six states that levy taxes after death, often called a death tax.
In 2019, Illinois State Representative Mike Murphy has proposed bill House Bill 0820 to change Illinois death taxes so they start at a higher estate value and are aligned with federal death tax rates. State Rep. Avery Bourne introduced House Bill 1454, which would totally repeal the estate tax.
Death taxes are taxes levied by the state and the federal government on an estate after someone dies. Federal estate taxes apply to large estates valued over $11.8 million and is up to 40%. There are two types of state death taxes: estate taxes and inheritance taxes.
1. Estate Taxes
After someone’s death, an Illinois estate tax is levied on estates that exceed $4 million in value. Illinois estate tax rates can be as high as 16% and payments are due nine months after someone’s death. If the assets of the deceased’s estate exceed $11.8 million, the estate is subject to both federal and estate death taxes.
2. Inheritance Taxes
Illinois does not have an inheritance tax. An inheritance tax is a tax on any assets or property an Illinois resident inherits from a deceased benefactor that is paid by the beneficiary, not the estate.
The primary difference between an estate tax and an inheritance tax is the estate pays all estate taxes before assets are distributed to heirs, where an inheritance tax is paid by the beneficiary after they receive their inheritance.
The assets in an estate tax are basically every single thing that a person owned when they died. This also includes proceeds that are commonly thought of as non-probate assets, such as grants, trust assets, life insurance, retirement accounts, beneficiary accounts, payable on death accounts, and everything that was in the decedent’s name when they died. Assets also include the value of land, the value of a business, the value of partnerships, stocks, bonds, cash, and all over assets of the decedent.
Reducing taxes is an important part of estate planning. By reducing taxes and creating the smallest possible tax burden on your heirs, you are maximizing the amount of money that will be available to protect your loved ones after you are gone. Estate planning also can eliminate the need for your estate to go to probates, which will can your loved one’s money, time and stress.
Do you have questions about protecting your loved ones after you are gone? Our experienced estate planning attorneys in Cook, Dupage, Kane, Lake, and Will counties in Illinois can advise you on the best options to protect your assets and loved ones. To talk to an estate planning attorney contact the Estate & Probate Legal Group at 630-687-9100.