If I'm an Illinois resident and both Illinois and Indiana taxed my gambling winnings, can I get an Illinois credit for the tax I paid to Indiana?

Subject

Credit - Foreign Tax

Plain-English summary

A married couple, both Illinois residents, wrote to the Illinois Department of Revenue explaining that their W-2G gambling winnings from Indiana had been taxed by both Indiana and Illinois for the 2016 and 2017 tax years. They had already spent money on an accountant and an out-of-state tax attorney trying to resolve the double taxation, without success, and asked the Department for help getting an Illinois credit for the tax they'd paid to Indiana.

The Department responded with a General Information Letter (GIL) rather than a binding ruling, since a GIL "is designed to provide general information, is not a statement of Department policy and is not binding on the Department" (86 Ill. Adm. Code 1200.120(b) and (c)).

The Department explained how the credit for taxes paid to other states works under 35 ILCS 5/601(b)(3): the credit is capped at an amount based on the ratio of the taxpayer's income that would be sourced to other states if all states used Illinois's own sourcing rules (as set out in Article 3 of the Illinois Income Tax Act), divided by total base income. This computation is done on Schedule CR.

The key problem for the couple: under Illinois's own sourcing rules (35 ILCS 5/301(c)(2), and Sections 302–304), a nonresident's gambling winnings are not allocated to Illinois at all — there's no provision that would source a nonresident, nonprofessional gambler's winnings to Illinois. The only exception is a professional gambler who reports winnings and losses as business income on federal Schedule C, who would apportion those winnings as business income under Section 304. Because Illinois wouldn't tax a nonresident's ordinary gambling winnings, the Schedule CR instructions don't allow gambling winnings to be entered in Column B (income sourced to other states) for a nonprofessional gambler. That means the fraction of "other-state-sourced income" used to compute the credit cap is zero, and "for the vast majority of residents who are taxed by another state only on gambling winnings, ... the credit allowed under Section 601(b)(3) is zero."

The Department noted that pending legislation (House Bill 3590, which had passed both houses of the Illinois General Assembly as of May 21, 2019) would source gambling winnings from Illinois gambling venues to Illinois under an amended Section 303 — but that change, even if enacted, would apply only to tax years ending on or after December 31, 2019, so it would not help with the couple's 2016 and 2017 tax years.

What this means for you

Illinois residents taxed on gambling winnings by another state

If you're an Illinois resident who won money gambling in another state and that state taxed your winnings, this letter indicates you likely will not get an Illinois credit for that tax under 35 ILCS 5/601(b)(3) — unless you're a professional gambler reporting the winnings as business income on federal Schedule C (in which case Section 304 apportionment could apply). For most recreational gamblers, the credit computed on Schedule CR comes out to zero because Illinois's own sourcing rules wouldn't have taxed a nonresident's winnings in the first place.

Accountants and tax professionals preparing Schedule CR

The letter walks through why gambling winnings generally cannot be entered in Column B of Schedule CR (income sourced to other states) for a nonprofessional gambler: there's no allocation or apportionment provision in Sections 302, 303, or 304 of the Illinois Income Tax Act that would source a nonresident's gambling winnings to Illinois, so the reciprocal computation used to cap the credit treats that income as having zero "other-state" source amount.

Anyone tracking the legislative fix

The letter flags House Bill 3590, which had passed both houses of the Illinois General Assembly as of May 21, 2019, and would have sourced gambling winnings from Illinois gambling venues to Illinois under an amended 35 ILCS 5/303. Even if that bill became law, the letter notes it would apply only prospectively, to tax years ending on or after December 31, 2019 — so it would not retroactively help taxpayers who were double-taxed for earlier years like 2016 and 2017. Readers should confirm the current status/text of Section 303 rather than relying on this 2019 letter's description of then-pending legislation.

Common questions

Q: Why doesn't Illinois give a credit for tax an Indiana casino/track already withheld or paid on gambling winnings?
A: The Illinois credit for tax paid to other states (35 ILCS 5/601(b)(3)) is capped by a ratio: it compares how much of your income would be sourced to other states if every state used Illinois's own sourcing rules. Because Illinois's own rules generally don't source a nonresident, nonprofessional gambler's winnings to Illinois, the same logic means gambling winnings can't be entered as "other-state sourced" income on Schedule CR — so the computed cap on the credit is zero for most recreational gamblers.

Q: Is there any situation where a professional gambler gets different treatment?
A: Yes. The letter notes an exception for "a professional gambler who reports gambling winnings and losses for federal purposes on Schedule C, Profit or Loss From Business, and who would apportion his or her gambling winnings as business income under the provisions of Section 304 of the Illinois Income Tax Act (35 ILCS 5/304)." The letter does not further detail how that apportionment would play out for the credit computation.

Q: Did the Department change the law to fix this double-taxation problem?
A: As of this May 2019 letter, House Bill 3590 had passed both houses of the Illinois General Assembly and would have sourced gambling winnings from Illinois gambling venues to Illinois under an amended Section 303 — but the letter states this would apply only to tax years ending on or after December 31, 2019, not to the 2016–2017 years at issue in the taxpayers' letter. The letter does not confirm whether the bill was ultimately signed into law.

Q: Is this letter a binding ruling that Illinois must follow in every gambling-credit case?
A: No. The Department expressly labels it a General Information Letter, stating it "does not constitute a statement of policy that applies, interprets or prescribes the tax laws, and it is not binding on the Department" (86 Ill. Adm. Code 1200.120(b) and (c)). A taxpayer who wants a binding answer on their specific facts would need to request a Private Letter Ruling by submitting the information required under 86 Ill. Adm. Code 1200.110(b).

Q: What should someone in this situation do next?
A: The letter itself suggests that a taxpayer who is not under audit and wants a binding answer on their own facts can request a Private Letter Ruling by submitting the information listed in items 1 through 8 of 86 Ill. Adm. Code 1200.110(b). Beyond that, the letter does not offer the couple any alternative path to relief for the 2016–2017 double taxation they described.

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/it19-0010-gil.pdf

Original ruling text

IT-19-0010-GIL 05/23/2019 CREDIT - FOREIGN TAX
Gambling winnings are sourced to the state of residence of the individual winner, so are not
included in the computation of the cap on the credit allowed under IITA Section 601 (b)(3).
(This is a GIL.)

May 23, 2019

Re: Illinois income tax
Dear Xxxx:
This is in response to your letter dated May 13, 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:
Supreme Court Rules that Two States May Not Tax the Same Income
My Husband, NAME, & I, NAME have tried several phone calls to your offices regarding
living in Illinois & gambling winnings in Indiana to no avail.
For the years 2016 & 2017 both Indiana and Illinois Taxed our W2G winnings. Even our
accountant has tried several calls & correspondence & again to no avail.
We hired an attorney from NAME Tax Group from STATE which they charged us $$$
for what they call Phase I to look over all documents in December of 2018. They also claim
they can’t get any answers. Now last week they said they will need an additional $$$ for
Phase II to pursue further in getting our tax credits.
My husband and I do not have the funds to go forward with this. Our last hope is you
can clear this up with your help, assistance & understanding. As you can see, we attempted to
get a tax credit from STATE (See Enclosed)
Please, please help us with this matter. We can come into offices if it’s easier. We
have all documents needed.
Thank You,
RULING
Section 601(b)(3) of the Illinois Income Tax Act (35 ILCS 5/601) allows residents to claim a credit for
income taxes paid to other states. That section 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 . . . 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.
The Schedule CR, Credit for Tax Paid to Other States, implements this limitation by having the
taxpayer list items of income from all sources in Column A of Lines 1 through 39, and write the

IT 19-0010-GIL
Page 2
amount that is sourced to other states using Illinois’ sourcing rules in Article 3 of the Illinois Income
Tax Act in Column B of each line, then writing the total income and total non-Illinois sourced income
on Line 42, and computing the fraction of income that is from non-Illinois sources on Line 43. This
fraction, multiplied by the taxpayer’s Illinois income tax liability before credits, yields the limit on the
credit allowed for taxes paid to other states.
In Article 3 of the Illinois Income Tax Act, Section 301(c)(2) (35 ILCS 5/301(c)(2)) provides:
Any item of income or deduction which was taken into account in the computation of base
income for the taxable year by any person other than a resident and which is not otherwise
specifically allocated or apportioned pursuant to Section 302, 303 or 304 . . . in the case of an
individual, trust or estate, shall not be allocated to this State.
Except in the case of a professional gambler who reports gambling winnings and losses for federal
purposes on Schedule C, Profit or Loss From Business and who would apportion his or her gambling
winnings as business income under the provisions of Section 304 of the Illinois Income Tax Act (35
ILCS 5/304), there is no provision in Sections 302, 303 or 304 that would allocate gambling winnings
of a nonresident to Illinois. Thus, if all states used Illinois’ rules for sourcing income, no other state
would tax gambling winnings of a nonresident gambler who is not a professional. Accordingly,
pursuant to the provision in Section 601(b)(3) quoted above, there is no provision in the instructions
to the Schedule CR that allows gambling winnings of a nonprofessional gambler to be included in
Column B of any line. For the vast majority of residents who are taxed by another state only on
gambling winnings, this means that the total income sourced to other states under Illinois’ rules is
zero, and the credit allowed under Section 601(b)(3) is zero.
Legislation that would change this result by providing that gambling winnings from Illinois gambling
venues are sourced to Illinois under an amended Section 303 of the Illinois Income Tax Act has been
introduced this year as House Bill 3590. As of May 21, 2019, it had passed both houses of the Illinois
General Assembly. However, that bill would change the law only for tax years ending on or after
December 31, 2019.
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