If a homeowner later receives a refund of property taxes (for example, from a certificate of error), does that refund reduce or require repayment of the Illinois property tax credit already claimed for the year the taxes were originally paid?

Plain-English summary

An Illinois homeowner wrote to the Department of Revenue after their county issued certificates of error retroactively applying a homeowner exemption to property tax years 2011-2014. Because the exemption had been missed when the taxpayer bought the home in 2010, the county recalculated the correct property tax for each of those years and was going to refund the taxpayer the difference between what was originally paid and the corrected (lower) amount. The taxpayer had already claimed the Illinois property tax credit under IITA Section 208 in each of those years based on the taxes actually paid at the time, and wanted to know how the upcoming refund should be treated for Illinois income tax purposes.

The Department explained that the property tax credit under Section 208 is based on the amount of property tax actually paid by the taxpayer during the taxable year for the taxpayer's principal residence, as further explained in Department Regulations Section 100.2180. When a taxpayer later receives a refund of property taxes paid in a prior year because of a certificate of error, that refund does not require the earlier year's credit to be recalculated or the taxpayer to file an amended return. The credit for each prior year stands as originally computed, based on what was actually paid at that time.

Instead, the refund is accounted for going forward: the amount of property tax refunded must reduce the amount of property tax treated as "paid" during the taxable year in which the refund is actually received. So if the taxpayer received the refund in 2016, the property tax credit computed on the 2016 return must reflect the 2016 property taxes paid minus the amount of the refund received in 2016. The Department also noted that no provision of the Illinois Income Tax Act requires "recapturing" income by adding back a previously-claimed credit in the year of the refund, comparing this treatment to several other IITA provisions and to a federal tax-benefit-rule provision (26 U.S.C. 111(b)) that do contain express recapture language, which Section 208 lacks.

In short, the Department effectively adopted the taxpayer's own "Option #2": net the refund against the property taxes paid in the year the refund is received, rather than reopening and amending prior years' returns.

What this means for you

If you receive a property tax refund after a certificate of error

You do not need to amend your Illinois income tax returns for the years in which you originally claimed the property tax credit based on the higher, pre-correction property tax amount. Those prior-year credits remain valid because they were correctly based on the property taxes you actually paid at the time.

How to handle the refund on your current return

When you actually receive the refund, reduce the amount of property tax you treat as "paid" for that year by the amount of the refund before computing your property tax credit (e.g., on Schedule ICR) for that year. This means the credit in the refund year will be smaller than it would have been without the refund, effectively spreading the correction forward rather than backward.

No separate income recognition or penalty exposure

Because Section 208 does not contain a recapture provision, you are not required to report the refund as additional income or otherwise increase your income tax liability for the year received beyond the reduced property tax credit computation described above.

Common questions

Q: I received a refund of property taxes I paid in a prior year because of a certificate of error. Do I need to amend my old Illinois tax returns?
A: No. The Department stated that the prior year's property tax credit is properly computed based on the amount of property tax actually paid during that year, and a later refund does not require the credit to be redetermined or the return to be amended.

Q: How does the refund affect my taxes for the year I actually receive it?
A: You must reduce the amount of property tax you treat as paid during that year by the amount of the refund before calculating your property tax credit for that year, which will lower the credit you can claim.

Q: Is the refunded amount treated as taxable income, similar to a state tax refund on a federal return?
A: This GIL does not require that treatment. The Department found that neither Section 208 nor any other IITA provision requires recapture of a previously allowed property tax credit when a refund is later received; the refund's only effect described is the reduction of the credit computed for the year the refund is received.

Q: Does this letter set binding Department policy?
A: No. It is a General Information Letter (GIL), which provides general information but is not a statement of Department policy and is not binding on the Department.

Citations and references

• 35 ILCS 5/208 (Illinois Income Tax Act, property tax credit)
• 86 Ill. Adm. Code 100.2180 (Department regulations on the Section 208 property tax credit)
• 86 Ill. Adm. Code 1200.120(b) and (c) (GIL status and non-binding nature)
• 35 ILCS 5/201(e)(7), 201(f)(6), 201(h)(6), 211(5), 220(d) (other IITA provisions referenced by comparison for recapture language)
• 26 U.S.C. 111(b) (federal tax benefit rule provision referenced by comparison)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2016.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2016/it-16-0001-gil.pdf

Original ruling text

IT 16-0001-GIL 02/03/2016

CREDIT FOR PROPERTY TAXES

For purposes of computing the credit under IITA Section 208, property taxes paid
during taxable year must be reduced by amount of property tax refunded during
taxable year.
February 3, 2016
Re:

Illinois property tax credit

Dear Xxxxx:
This is in response to your letter dated January 11, 2016 in which you request information
related to the Illinois income tax. The nature of your letter and the information provided
require that we respond with a General Information Letter (GIL). A GIL 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 accessed
from the Department’s web site at www.tax.illinois.gov.
Your letter states as follows:
I am writing to obtain official guidance on the treatment of property tax refunds to
be issued to me by COUNTY in connection with certificates of errors issued in
December 2015. When I purchased my home in 2010, I was unaware of the
availability of a homeowner exemption for property tax purposes, and property
taxes were assessed without applying that exemption. I became aware of this
exemption in late 2015 and promptly applied for certificates of error for property
tax years 2011, 2012, 2013, and 2014, which the COUNTY Assessor’s issued in
December 28, 2015. As a result, COUNTY retroactively applied the homeowner
exemption to those property tax years and will be issuing me a refund for the
difference between the amount of property tax I paid for those years and the
amount of adjusted property tax when taking the homeowner exemption into
consideration.
Since I claimed a property tax credit on my Illinois state income tax return for
property taxes paid in each year, I would like to understand the Illinois Department
of Revenue’s position on the effect, if any, receiving these refunds would have on
my Illinois state income taxes. My legal research has not turned up anything in
Illinois regulations specifically addressing how to handle refunds due to certificates
of error. Below is a summary of my tax returns and the hypothetical effect of the
certificate of error on my return had property taxes been properly assessed at the
time.
[Table omitted]

For 2015 (2014 property tax year), I paid $$$ in property taxes. The adjusted
property tax amount after the certificate of error is $$$. Based on the amount I paid
in property taxes during 2015, I would be entitled to a $$$ property tax credit on
my 2015 return (assuming the credit is still 5% for 2015 and has not been reduced
3.75% for 2015 on the new Schedule ICR). Based on the adjusted property tax
amount accounting for my refund to be received in 2016, my property tax credit
would be $$ lower.
I can envision four potential ways to treat the certificates of error for Illinois income
tax purposes:
Option #1: The refund has no effect on Illinois income taxes since, under Schedule
ICR and Publication 108, you are entitled to any amount of property taxes paid in
a year, and there is nothing to indicate refunds must be taken into consideration.
Option #2: Net the refund amount received in 2016 against the property taxes paid
in 2016 (for the 2015 property tax year) and claim only the net amount of property
taxes paid in 2016 on my 2016 Schedule ICR. This takes into account the reduction
in property taxes for prior years by reducing my credit for 2016.
Option #3: Treat the property tax refunds as other additional income on Schedule
M for the 2016 tax return, similar to how state tax refunds are recognized as income
on the following year’s federal tax returns for itemizing filers.
Option #4: File amended tax returns for 2012, 2013, and 2014, and limit the
property taxes claimed on Schedule ICR to the reduced amount after considering
the certificate of error.
I propose Option #2 as the most legally supportable and practical solution.
Schedule ICR and Publication 108 both cite to property taxes paid in a given year
as the relevant amount for the property tax credit, and thus provide for a cash basis
tax treatment rather than focus on the amount of property taxes that should have
been assessed for that year. A cash basis treatment is consistent with the fact that
property taxes are claimed a year in arrears based on when they are paid (e.g.
taxes paid in 2012 for 2011 property tax year are credited on the 2012 return), and
the fact that under Publication 108 back taxes paid can be claimed in the year they
are paid. Under this approach, since I did pay the additional property tax in past
years, under Schedule ICR I was entitled to a higher credit in those years based
on those higher payments. It is intuitive that the tax effect of the property tax
refunds would line up with when they are received, and it is pragmatic as well, as
basing the property tax credit on yearly cash flows alleviates the need for filing
amended returns or extensions of return due dates due to changing circumstances
or uncertainty surrounding the amount of property tax owed for a year (from
litigation, property tax appeals, etc.). Option #3 would likewise be a pragmatic and
equitable solution.
Option #4 would create additional work and burden of filing three amended returns
for what amounts to less than $$$ of taxes for each of my returns. This option also
appears to contradict the cash basis treatment provided for by Schedule ICR and
Publication 108. A cash basis approach is consistent with tax treatment in other
contexts, such as counting the state tax refund as income the following year on

federal tax returns rather than requiring an amended return every time a refund is
received. If the Department were to adopt this position, the effect would be that
every Illinois income tax filer that receives a certificate of error from their county
would be required to amend their prior tax return(s) and potentially pay interest
and penalty. This is much more cumbersome than the forward-looking approach
in Options #2 and #3. If the Department takes this position, I at least request relief
from penalty and interest on the amounts owed, as I filed my returns in good faith
based on the actual amounts of property tax paid at the time, and I did not receive
a windfall from the time value of money since I actually did pay the higher amounts
of property taxes in those years.
RULING
Section 208 of the Illinois Income Tax Act (“IITA” 35 ILCS 5/208) provides the following
credit:
Beginning with tax years ending on or after December 31, 1991, every individual
taxpayer shall be entitled to a tax credit equal to 5% of real property taxes paid by such
taxpayer during the taxable year on the principal residence of the taxpayer. In the case
of multi-unit or multi-use structures and farm dwellings, the taxes on the taxpayer’s
principal residence shall be that portion of the total taxes which is attributable to such
principal residence.
Department Regulations Section 100.2180, which provides rules in respect of the credit
under IITA Section 208, states, in part, as follows:
b) A taxpayer will qualify for the property tax credit if:
1) the taxpayer's principal residence during the year preceding the tax year at
issue was in Illinois, and
2) the taxpayer owned the residence, and
3) the property tax billed in the tax year at issue has been paid. This is the amount
paid after factoring in any applicable exemptions.
c) The credit may be based on the entire property tax bill if:
1) the taxpayer lived in the same residence during all of the year preceding the tax
year at issue, and
2) the tax bill included property used only for the taxpayer's personal residence,
yard, garage, or other structure used for personal purposes. If the property tax bill
included not only taxpayer's personal residence, but also business, rental, or farm
property, that credit may be calculated only on that portion of the property tax bill
that is for the personal residence. The credit may not be taken for a vacation
home.

Pursuant to these provisions, the amount of the property tax credit is based on the amount
of Illinois property taxes actually paid by the taxpayer during the taxable year with respect
to the taxpayer’s principal residence. The fact that, in a subsequent taxable year, the
taxpayer receives a refund of Illinois property taxes paid in a prior taxable year pursuant
to a certificate of error, does not require the prior year’s credit under Section 208 to be
redetermined. The credit for the prior year is properly computed based on the amount of
property tax actually paid during such year. Therefore, you should not file an amended
return for any of your prior taxable years in order to reduce the amount of the credit
allowed under IITA Section 208.
In addition, neither Section 208 nor any other provision of the IITA requires the recapture
of a property tax credit properly claimed for a taxable year where, in a subsequent taxable
year, the taxpayer receives a refund of such property taxes pursuant to a certificate of
error. Compare IITA Sections 201(e)(7), 201(f)(6), 201(h)(6), 211(5), 220(d); 26 U.S.C.
111(b). Therefore, you are not required to increase the amount of income tax due for the
taxable year in which the refund is received for any amount of property tax credit allowed
in the prior taxable year.
IITA Section 208, set forth above, provides a credit equal to 5% of real property taxes
“paid by such taxpayer during the taxable year on the principal residence of the taxpayer.”
For purposes of this provision, the amount considered paid during any taxable year
should be reduced by any amount of property tax refunded during the taxable year for
property taxes previously paid in error. Thus, where a taxpayer receives a refund of
property taxes paid during prior taxable years pursuant to a certificate of error, the amount
of such refund reduces the amount of property tax paid during the taxable year for
purposes of computing the property tax credit for the taxable year in which the refund
occurs. In your case, in determining the amount of property taxes paid during your 2016
taxable year for purposes of computing your property tax credit for 2016, you should
reduce the amount paid by the amount of any property tax refund received in 2016.
As stated above, this is a GIL. A GIL 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 have
further questions regarding this GIL, please call (217) 782-2844. If you have additional
questions regarding Illinois income tax laws, please visit the Department’s website at
www.tax.illinois.gov.

Sincerely,

Brian L. Stocker
Associate Counsel (Income Tax)