Could an Illinois resident claim a credit for other-state tax on wages that the employer's W-2 sourced entirely to Illinois?

Plain-English summary

Illinois said the resident's other-state tax credit limit was zero on the submitted records. The employer's W-2 sourced all compensation to Illinois, and Schedule CR showed no other income that Illinois allocation rules would source outside the state.

The representative pointed to an employer work-hour allocation and an older regulation. The Department said hours worked in each state were not the controlling test for this purpose and that the submitted regulation did not reflect the statutory change applying after 2009.

What this means for you

Paying another state tax on the same wages does not by itself establish the Illinois credit amount. First determine where Illinois law sources the compensation and make sure the W-2 and Schedule CR reflect that analysis.

Common questions

Q: Did the employer's time-sheet allocation prove out-of-state sourcing?
A: No. The GIL said that allocation was not relevant under the applicable Illinois test.

Q: Why was the credit limit zero?
A: Because the records showed no income that would be sourced outside Illinois if other states used Illinois allocation rules.

Citations and references

• 35 ILCS 5/601(b)(3)
• 35 ILCS 5/302(a) and 5/304(a)(2)(B)
• 86 Ill. Adm. Code 100.2197

Subject

Credits – Foreign Tax

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2015/it-15-0003-gil.pdf

Original ruling text

IT 15-0003 GIL 5/7/2015
Credits – Foreign Tax
Compensation paid in Illinois under IITA Section 304(a)(2)(B) does not qualify for the credit for
taxes paid to other states.

May 7, 2015

Re:

TAXPAYER – Credit for Taxes Paid to Other States

Dear Mr. XXXX:
This is in response to your letter to NAME of the Illinois Department of Revenue’s Problems
Resolution Division, dated May 4, 2015. The nature of your request and the information you
have provided require that we respond with a General Information Letter, which is designed to
provide general information, is not a statement of Department policy and is not binding on the
Department. See 86 Ill. Adm. Code 1200.120(b) and (c), which may be found on the
Department's web site at www. tax.illinois.gov.
In your letter you have stated the following:
I am submitting the enclosed paperwork under power of attorney for abovenamed taxpayer to enable you to accept the 2011 IL tax return as originally.
This case is similar to the other cases my firm has submitted for other
BUSINESS employees, in that the taxpayers are Illinois residents who have
had credit for taxes paid to other states disallowed.
The State has already denied the credit from other states in letters dated XXX-XX and XX-XX-XX. As a result of the history of correspondence that is
ultimately denying the tax credit, we believe that this case is eligible for
consideration by your office.
We believe this is a case of double taxation and it would be unfair to not
allow a credit for taxes paid to the other states on the same income. To
support my position, I am enclosing an excerpt from IDOR Regulations
which addresses the issue. I have underlined the applicable lines on the
third page. In general, it states that compensation paid in Illinois that is
taxed in other states may be included in double-taxed income in taxable
years beginning on or after January 1, 2006.
The Form W-2 provided by TAXPAYER’s employer indicates in Box 16 that 100% of her
INCOME in compensation for 2011 was sourced to Illinois. In the letter from the employer,
dated XX-XX-XX, which you enclosed with your letter, the employer states that only
ALLOCATED AMOUNT of her compensation was sourced to Illinois, “based on where the

IT 15-0003 GIL 5/7/2015
Credits – Foreign Tax
Compensation paid in Illinois under IITA Section 304(a)(2)(B) does not qualify for the credit for
taxes paid to other states.
associated work has been performed for the client. That allocation is calculated based on
timesheet hours.”
Response

The credit for taxes paid to other states is allowed by Section 601(b)(3) of the Illinois Income
Tax Act (35 ILCS 5/601), which also provides:
For taxable years ending on or after December 31, 2009, the credit provided under this
paragraph for tax paid to other states shall not exceed that amount which bears the same
ratio to the tax imposed by subsections 201(a) and (b) otherwise due under this Act as the
amount of the taxpayer's base income that would be allocated or apportioned to other
states if all other states had adopted the provisions in Article 3 of this Act bears to the
taxpayer's total base income subject to tax by this State for the taxable year.
In other words, a resident is entitled to a credit for any taxes paid to other states on income taxed
by Illinois, but the total credit cannot exceed a limit. The limit equals the amount of Illinois
income tax attributable to the income that is sourced outside Illinois using Illinois’ allocation and
apportionment provisions, determined by taking the taxpayer’s Illinois tax before credits, and
multiplying it by a fraction equal to the base income that would be allocated or apportioned to
other states if they all used Illinois allocation and apportionment rules, divided by the taxpayer’s
total base income.
In the allocation and apportionment provisions of Article 3 of the Illinois Income Tax Act,
Section 302(a) (35 ILCS 5/302) provides:
All items of compensation paid in this State (as determined under Section
304(a)(2)(B)) to an individual who is a nonresident at the time of such payment
and all items of deduction directly allocable thereto, shall be allocated to this
State.
Section 304(a)(2)(B) of the Illinois Income Tax Act (35 ILCs 5/304) provides that, for
employees other than professional athletes:
Compensation is paid in this State if:
(i) The individual's service is performed entirely within this State;
(ii) The individual's service is performed both within and without this
State, but the service performed without this State is incidental to the individual's
service performed within this State; or
(iii) Some of the service is performed within this State and either the base
of operations, or if there is no base of operations, the place from which the service
is directed or controlled is within this State, or the base of operations or the place
from which the service is directed or controlled is not in any state in which some
part of the service is performed, but the individual's residence is in this State.

IT 15-0003 GIL 5/7/2015
Credits – Foreign Tax
Compensation paid in Illinois under IITA Section 304(a)(2)(B) does not qualify for the credit for
taxes paid to other states.
Publication 130, Who is Required to Withhold Illinois Income Tax, provides guidance on
determining when compensation is sourced to Illinois and instructs employers:
When completing the W-2, enter only the amount of wages paid in Illinois or paid
to an Illinois resident employed in Iowa, Kentucky, Michigan or Wisconsin in
Box 16. If none of the employee’s wages were paid in Illinois or for an Illinois
resident’s employment in a non-reciprocal state, report zero in Box 16 even if you
withheld Illinois income tax from those wages. Illinois residents who pay income
tax to other states need this information in order to compute the credit allowed for
those taxes.
As noted above, the W-2 provided by TAXPAYER’s employer indicates that all of her
compensation is sourced to Illinois. This would indicate that none of her compensation would be
sourced to other states if they all followed Illinois’ rule for sourcing compensation. Because the
Schedule CR, Credit for Tax Paid to Other States, she attached to her return shows no other
income that would be sourced to other states under Illinois’ allocation and apportionment rules,
the limit on her credit should be zero.
The letter from the employer you provided states that the allocation of employee compensation
that it shows is based on the hours worked in each state, which is not relevant for this purpose.
Also, the copy of the 86 Ill. Adm. Code Section 100.2197 you provided is out of date. It does
not reflect the changes to Section 601(b)(3) of the Illinois Income Tax Act that apply to taxable
years ending on or after December 31, 2009, quoted above, and has since been amended to apply
the new statute. Accordingly, you have not provided us with any information that would show
that our determination of TAXPAYER’s credit is incorrect.
As stated above, this is a general information letter which does not constitute a statement of
policy that applies, interprets or prescribes the tax laws, and it is not binding on the Department.
If you are not under audit and you wish to obtain a binding Private Letter Ruling regarding your
factual situation, please submit all of the information set out in items 1 through 8 of Section
1200.110(b). If you have any further questions, you may contact me at (217) 782-7055.
Sincerely,

Paul S. Caselton
Deputy General Counsel – Income Tax