Ill. Admin. Code tit. 86, § 100.2450 - IIT Refunds (IITA Section 203(a)(2)(H), (b)(2)(F), (c)(2)(J) and (d)(2)(F))
a) The "tax benefit
rule" codified in Internal Revenue Code section 111 applies when a taxpayer
receives a tax benefit from claiming a deduction for an expense in one year and
recovers or is compensated or reimbursed for the expense in a subsequent
taxable year. Under the tax benefit rule, the recovery or compensation for the
expense is included in income in the year it is received. Thus, when the
taxpayer deducts State income taxes paid in one taxable year and receives a
refund of some or all of the payment in a subsequent year, the tax benefit rule
requires the taxpayer to include the refund in federal taxable income or
adjusted gross income for the taxable year of the refund. If, however, the
expense did not reduce the taxpayer's federal income tax, the recovery or
compensation is excluded from income under Internal Revenue Code section
111(a).
b) The regular income tax
imposed directly on an individual is allowed only as an itemized deduction for
federal income tax purpose and so is not deducted in computing adjusted gross
income. Because Illinois does not allow itemized deductions, and any Personal
Property Tax Replacement Income Tax deducted in computing adjusted gross income
because it is passed through from a partnership, Subchapter S corporation, or
trust is added back under IITA Section 203(a)(2)(B), IITA Section 203(a)(2)(H)
allows individuals to subtract any such refund included in adjusted gross
income. The purpose of this subtraction and the addition of IITA Section
203(a)(2)(B) is to render the payment of Illinois income tax and replacement
income tax neutral in the computation of adjusted gross income.
c) All other taxpayers are required to add
back any Illinois regular income tax or replacement tax deducted in computing
their federal taxable income. (See IITA Section 203(b)(2)(B) (corporations),
(c)(2)(C) (trusts and estates) and (d)(2)(B) (partnerships)). Because these
taxpayers receive no Illinois income tax benefit from these deductions, any
refund of Illinois regular income tax or replacement tax that is included in
the taxpayer's federal taxable income may be subtracted under IITA Section
203(b)(2)(F) (corporations), (c)(2)(J) (trusts and estates) and (d)(2)(F)
(partnerships).
Notes
Added at 32 Ill. Reg. 3400, effective February 25, 2008
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