Does the taxable cost of group-term life insurance over $50,000 count toward an employee's Illinois base income, and should it be included in Box 16 (state wages) of Form W-2?

Plain-English summary

A tax preparer wrote to the Illinois Department of Revenue with a specific W-2 puzzle: an employer had reported one (higher) wage figure in Box 1 (federal wages) but a lower figure in Box 16 (state wages), with the difference equal to the taxable cost of "group-term life insurance over $50,000" reported in Box 12a, Code C. The preparer believed Box 16 should match Box 1, since the employee worked entirely in Illinois, but the employer disagreed — and the preparer said the Department itself had refused to give a definitive answer on this exact question for over 15 years.

In this letter, the Department finally answered directly: yes, Box 16 should match Box 1. Its reasoning starts with the basics of Illinois income tax. Illinois net income is built directly off federal adjusted gross income (AGI). Under Internal Revenue Code Section 79, the cost of employer-provided group-term life insurance above $50,000 of coverage is taxable and must be included in federal gross income (and therefore in AGI). Illinois' own list of addition and subtraction modifications in IITA Section 203 — the adjustments used to convert federal AGI into Illinois base income — contains no subtraction for this specific item. Because there's no federal exclusion and no Illinois subtraction available, the amount stays in income for Illinois purposes just as it does for federal purposes.

From there the W-2 mechanics follow naturally: since the cost of coverage over $50,000 is already folded into Box 1, Box 3, and Box 5, and since the employee in the hypothetical worked entirely in Illinois, all of those wages are Illinois wages. Box 16 is supposed to capture total state wages, so it should equal Box 1, including the group-term life insurance add-on.

As with any GIL, the Department is careful to note that this letter is general guidance only — it "does not constitute a statement of policy that applies, interprets or prescribes the tax laws" and is not binding on the Department for anyone's specific facts. The letter also reminds the taxpayer that if a truly binding answer is needed, a Private Letter Ruling can be requested under 86 Ill. Adm. Code 1200.110(b).

What this means for you

Employers and payroll professionals

If an employee works entirely in Illinois, the taxable cost of group-term life insurance coverage over $50,000 (the amount coded in Box 12a, Code C) should be included in Box 16 along with the rest of Box 1 wages. Reporting a lower figure in Box 16 that excludes this amount is not supported by this letter's reasoning, since there is no Illinois subtraction modification for it.

Accountants and tax professionals

This GIL is useful because it resolves a specific, recurring W-2 mismatch question that the Department reportedly would not answer definitively for years. The logic chain is: IRC Section 79 pulls the cost into federal gross income → Illinois base income starts from federal AGI → IITA Section 203 has no subtraction for it → so it stays taxable for Illinois, and follows through to Box 16 wage reporting for employees working wholly in-state. Keep in mind this reasoning was built around a specific hypothetical (single-state employee); multi-state wage allocation questions aren't addressed here.

Business owners

If you provide group-term life insurance coverage above $50,000 to employees, be aware the taxable cost of the excess coverage is treated as ordinary wages for both federal and Illinois purposes, with no special Illinois carve-out. Payroll reporting should reflect that consistently across Box 1 and Box 16 for employees who work entirely in Illinois.

Common questions

Q: Does Illinois give a subtraction for the taxable cost of group-term life insurance over $50,000?
A: No. The Department states that none of the addition or subtraction modifications listed in IITA Section 203 include a subtraction for this cost, so it remains part of Illinois base income.

Q: Should Box 16 (state wages) match Box 1 (federal wages) when this issue is present?
A: For an employee who works entirely in Illinois, yes — the Department concluded the amounts should match, including the group-term life insurance cost reported under Box 12a, Code C.

Q: Is this letter binding on the Department or on other taxpayers?
A: No. It is a General Information Letter under 86 Ill. Adm. Code 1200.120(b) and (c) — general guidance only, not a statement of Department policy, and not binding. A taxpayer who needs a binding answer for their own facts can request a Private Letter Ruling under 86 Ill. Adm. Code 1200.110(b).

Q: What if the employee works in more than one state?
A: This letter doesn't address that scenario. It answers only the hypothetical presented, where the employee worked entirely in Illinois, so all wages (including the group-term life insurance add-on) were Illinois wages.

Citations and references

• 35 ILCS 5/201 — imposes Illinois income tax measured by net income on individuals, corporations, trusts, and estates.
• 35 ILCS 5/203 — sets out the addition and subtraction modifications used to convert federal AGI into Illinois base income; contains no subtraction for taxable group-term life insurance cost over $50,000.
• 26 U.S.C. § 79 — requires the cost of employer-provided group-term life insurance coverage over $50,000 to be included in federal gross income.
• 86 Ill. Adm. Code 1200.120(b) and (c) — establishes that a General Information Letter is general guidance only, not a statement of Department policy, and not binding on the Department.
• 86 Ill. Adm. Code 1200.110(b) — describes the information required to request a binding Private Letter Ruling.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2019.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2019/it19-0004-gil.pdf

Original ruling text

IT 19-0004-GIL 04/02/2019 BASE INCOME

Group-term life insurance coverage over $50,000 is considered part of AGI for purposes of
calculating Illinois base income. (This is a GIL.)

April 2, 2019
Re: Illinois income tax
Dear Xxxx:

This is in response to your letter received March 11, 2019, in which you request information regarding
Illinois income tax. 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.

Your letter states as follows:
Enclosed is a copy of a W-2 form that was received by one of my tax clients. Certain information
has been blacked out. It is being enclosed so you can better understand the tax issue in
question.
Wages of $$$ is being reported in box#1. Wages of $$$ is being reported in box #16. The
difference between these two amounts is $$$. This amounts to the premium related to “Group-
term life insurance over $$$” which has been reported in Box 12a, Code C.

The question is what is the proper amount of wages to report in box 16 for state wages? | believe
the proper amount should be $$$, the same amount which is being reported in box 1.

Following is some additional information:

1. The employee works entirely Illinois and therefore, it would seem appropriate to report
   the same amount in box#16 as has been reported in box#1.
2. Illinois tax form IL-1040, line 1, reports the “Federal adjusted gross income from your

federal form 1040, line 7”. Federal adjusted gross income will include wages of $$$.
There is no line on Schedule M of Illinois form IL-1040 which will allow someone to report
a subtraction pertaining to the “Premium related to group-term life insurance over $$$.”

3. Illinois form IL-1040 now requires Schedule IL-WIT which reports the Federal Wages,
   Illinois Wages and Illinois income tax withheld for each W-2 and 1099 form. Reporting
   Illinois wages on this form which are different from federal wages may raise an audit
   question.

| have talked to this employer a couple of times to suggest that their reporting is incorrect. The
employer disagrees. | talked to the Illinois Department of Revenue and they will not give a
definitive answer. This has been an issue for over 15 years.

It would be nice to get a definitive answer in writing, which would, if appropriate, be presented
to the employer.

Please contact me if you need additional information.

IT 19-0004-GIL
Page 2

RULING

Section 201 of the Illinois Income Tax Act (“IITA”), 35 ILCS 5/101 et seq, imposes a tax measured by
net income “on every individual, corporation, trust and estate ... on the privilege of earning or receiving
income in or as a resident of this State. Such tax shall be in addition to all other occupational or privilege
taxes imposed by this State or by any municipal corporation or political subdivision thereof.”

Net income for Illinois income tax purposes is a taxpayer’s federal adjusted gross income (“AGI”).
Accordingly, any sum properly excluded or deducted from income for federal purposes prior to the
determination of AGI is effectively excluded from income for Illinois’ purposes. Likewise, any sum
required to be included income for federal purposes prior to the determination of AGI is effectively
included income for Illinois’ income tax purposes.

Section 79 of the Internal Revenue Code, 26 U.S.C. §79, generally requires that federal gross income
shall include the cost of group-term life insurance on an employee's life provided for part or all of a
taxable year under a policy carried directly or indirectly by his or her employer; but only to the extent
that such cost exceeds the sum of: (1) the cost of $50,000 of such insurance, and (2) the amount (if
any) paid by the employee toward the purchase of such insurance. IITA Section 203 provides for
certain addition and subtraction modifications to arrive at a taxpayer’s Illinois base income. These
modifications either add or subtract certain amounts of income from a taxpayer's federal AGI. None of
the modifications to AGI described in Section 203 include a subtraction modification for the taxable cost
of an employee’s group-term life insurance over $50,000. Since there are no federal or Illinois
subtraction modifications available for such costs of group-term life insurance, this amount should be
considered included income for Illinois’ income tax purposes.

The cost of group-term life insurance over $50,000 needs to be reported on Form W-2, in Box 12a
under Code C and included in the amounts reported in boxes 1, 3, and 5 of Form W-2. See Department
of Treasury, Internal Revenue Service, General Instructions for Forms W-2 and W-3, page 10
(https://www.irs.gov/pub/irs-pdf/iw2w3.pdf). Form W-2, Box 16 is intended to be used to report wages
for up to two states. See General Instructions for Forms W-2 and W-3.

In your hypothetical, the employee worked entirely in Illinois, meaning all wages listed in the supplied
Form W-2, Box 1 were earned in Illinois. The amount reported in Box 12a under Code C, are
considered wages and appear to be correctly included in the amounts reported in Boxes 1, 3 and 5.
Therefore, since Box 16 is intended to include all wages earned in Illinois, you are correct in stating
that the wages reported in Box 16 should match the wages reported in Box 1 and include the taxable
costs for cost of group-term life insurance on an employee's life reported in Box 12a under Code C.

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 regarding this letter, you may contact me at (217) 782-2844.

Sincerely,

Michael D. Mankowski
Associate Counsel (Income Tax)

IT 19-0004-GIL
Page 3