When an Illinois resident pays alimony and earns income taxed by another state that won't let her deduct the alimony against that nonresident income, does the alimony still reduce her Illinois credit for taxes paid to that other state?

Subject

Credits – Foreign Tax

Plain-English summary

A representative wrote to the Illinois Department of Revenue on behalf of an Illinois-resident taxpayer, asking the Department to explain a Return Correction Notice that reduced her credit for income tax paid to another state (referred to as "STATE") from one dollar amount to a lower one. The taxpayer had earned income from STATE during the year and paid STATE nonresident income tax on it. She also paid alimony to her former husband (also an Illinois resident) that same year. STATE did not allow her to deduct that alimony against her STATE-source nonresident income, so, in the representative's view, the full STATE income amount should have counted as "double taxed" for purposes of the Illinois credit. Instead, the Return Correction Notice reduced the STATE income treated as double-taxed by a percentage tied to the alimony paid, which the representative argued did not seem reasonable given the small percentage the alimony represented of total income.

The Department's ruling walked through the mechanics of the credit under 35 ILCS 5/601(b)(3): an Illinois resident can claim a credit for income tax paid to another state, but that credit cannot exceed a limitation amount computed as a fraction — the numerator is the taxpayer's base income that would be allocated/apportioned to other states if those states had adopted Illinois's own allocation and apportionment rules under Article 3 of the Illinois Income Tax Act ("IITA"), and the denominator is the taxpayer's total base income.

The Department explained that under Article 3 of the IITA, nonresidents are allowed to allocate 100% of an alimony deduction to Illinois (citing Lunding v. New York Tax Appeals Tribunal, 522 U.S. 287 (1998)). Since the credit limitation's numerator is built by assuming other states followed Illinois's Article 3 rules, and Article 3 would have allowed the taxpayer's alimony deduction in full against STATE income if STATE had adopted it, the Department concluded that the alimony deduction must be allocated to STATE in computing that numerator. In practical terms, this shrinks the numerator (the amount treated as taxed by the other state), which shrinks the overall credit limitation fraction — meaning less of the tax paid to STATE can be credited against the taxpayer's Illinois tax.

As with all GILs, the Department stated this letter "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)).

What this means for you

Illinois residents who pay alimony and earn income taxed by another state

If you're an Illinois resident who earns income taxed by another state and you also pay deductible alimony, this letter indicates the Department's position that the alimony deduction gets allocated to the other state when computing your credit-limitation fraction under 35 ILCS 5/601(b)(3) — even if that other state itself would not have allowed you to deduct the alimony against your nonresident income there. The practical effect in the ruling was to reduce, not increase, the taxpayer's allowable Illinois credit for tax paid to the other state, because it lowered the amount of income treated as taxed twice.

Accountants and tax professionals preparing Schedule CR

The letter confirms the Department's view that Schedule CR's "instructions to the form" reduction (which the taxpayer's representative questioned as unreasonable) reflects the correct application of 601(b)(3)'s credit limitation, because the numerator of the limitation fraction is built by assuming other states adopted Illinois's Article 3 allocation rules — and those rules give nonresidents a 100% Illinois allocation for the alimony deduction. The Department did not address whether the specific percentage-of-income methodology used on the Return Correction Notice was itself correct; it addressed only the underlying legal question of whether an alimony allocation adjustment belongs in the calculation at all.

Anyone relying on this letter

This is a General Information Letter, not a Private Letter Ruling. The Department itself states the letter "is not a statement of Department policy and is not binding on the Department" (86 Ill. Adm. Code 1200.120(b) and (c)). A taxpayer who wants a binding answer on their own specific facts would need to submit a request for a Private Letter Ruling under 86 Ill. Adm. Code 1200.110(b).

Common questions

Q: Does paying alimony reduce or increase an Illinois resident's credit for tax paid to another state?
A: Based on this letter, it reduces it. The Department ruled that the alimony deduction must be allocated to the other state ("STATE") in computing the numerator of the credit-limitation fraction under 35 ILCS 5/601(b)(3), which lowers the amount of income counted as taxed by both states and thus lowers the allowable credit.

Q: Why does the alimony deduction get allocated to the other state at all, if that state didn't allow the deduction?
A: The Department explained that the credit-limitation numerator is computed by assuming that other states had adopted Illinois's own Article 3 allocation and apportionment rules. Under Article 3, nonresidents are allowed to allocate 100% of the alimony deduction to Illinois. Because that hypothetical scenario is what the statute requires the Department to assume, the alimony deduction is allocated to STATE for purposes of the calculation — regardless of what STATE's own actual rules provide.

Q: Did the Department say the Return Correction Notice's specific math (the percentage reduction) was correct?
A: The ruling addresses the underlying legal principle — that an alimony-based adjustment belongs in the credit-limitation numerator — rather than verifying the specific percentage or dollar figures used on the taxpayer's Return Correction Notice. The letter does not walk through the taxpayer's actual numbers.

Q: What statute governs this credit for taxes paid to other states?
A: Section 601(b)(3) of the Illinois Income Tax Act, 35 ILCS 5/601(b)(3), which allows Illinois residents a credit for income tax paid to other states on income also taxed by Illinois, subject to a limitation fraction described in the statute.

Q: Is this letter binding on the Illinois Department of Revenue?
A: No. It is a General Information Letter issued under 86 Ill. Adm. Code 1200.120(b) and (c), and the letter itself states it "does not constitute a statement of policy that applies, interprets or prescribes the tax laws, and it is not binding on the Department."

Q: What if I want a binding answer for my own situation?
A: The letter states that if you are not under audit and want a binding Private Letter Ruling on your factual situation, you must submit the information listed in items 1 through 8 of 86 Ill. Adm. Code Section 1200.110(b).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2020/it20-0005-gil.pdf

Original ruling text

IT 20-0005-GIL 01/27/2020 CREDITS – FOREIGN TAX
Alimony Deduction Reduces Credit Limitation Under IITA Section 601(b)(3)
January 27, 2020
Re:

Illinois income tax

Dear Xxxx:
This is in response to your letter received April 29, 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:
On behalf of the above-named Taxpayer, we hereby request explanation for Return Correction
Notice (copy enclosed) reducing Taxpayer’s credit for income tax paid to STATE from $$$ to
$$$.
Taxpayer is a resident of Illinois who earned $$$ from the State of STATE during calendar year
20XX. Accordingly, Taxpayer paid STATE income tax on such amount as reflected on her
STATE Nonresident Personal Income Tax Return (copy enclosed). Taxpayer paid alimony to
her former husband, amounting to $$$ in calendar year 20XX. Taxpayer’s former husband is
also a resident of Illinois. Accordingly, STATE did not allow a deduction for the alimony paid in
Illinois against the nonresident income earned in such state.
The Return Correction Notice recomputed Taxpayer’s STATE credit on 20XX Schedule CR by
reducing STATE income for % of the alimony paid to Taxpayer’s ex-husband and, accordingly,
reflected only $$$ of income as double taxed rather than the correct $$$. Upon discussing this
matter with a representative of the Illinois Department of Revenue, we were told that the
“instructions to the form” requires such a reduction. However, it does not appear reasonable that
the alimony paid would be considered % from the STATE based income when such amount is
only approximately % of the total income reported by Taxpayer. It appears more reasonable that
alimony paid to an Illinois resident would be deductible against Illinois income and to charged to
STATE income for determining double taxation.
Taxpayer respectfully requests an opinion for your office regarding the above. We are assisting
the Taxpayer in making this request as the third-party designee reflected on Taxpayer’s 20XX
Form IL-1040.

RULING
Section 601(b)(3) of the Illinois Income Tax Act (“IITA”; 35 ILCS 5/601(b)(3)) provides Illinois residents
a credit for income taxes paid to other states, as follows:
The aggregate amount of tax which is imposed upon or measured by income and which is paid
by a resident for a taxable year to another state or states on income which is also subject to the

IT 20-0004-GIL
Page 2
tax imposed by subsections 201(a) and (b) of this Act shall be credited against the tax imposed
by subsections 201(a) and (b) otherwise due under this Act for such taxable year.
…
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. The credit provided by this paragraph shall not
be allowed if any creditable tax was deducted in determining base income for the taxable year.
Any person claiming such credit shall attach a statement in support thereof and shall notify the
Director of any refund or reductions in the amount of tax claimed as a credit hereunder all in
such manner and at such time as the Department shall by regulations prescribe (Emphasis
added).
The italicized language above limits the amount of tax paid to other states that may otherwise qualify
for the credit. That limitation is determined by multiplying the amount of Illinois income tax otherwise
imposed for the taxable year by a fraction, the numerator of which is the amount of the taxpayer’s base
income that would be allocated or apportioned outside of Illinois assuming that all other states adopted
Illinois’ allocation and apportionment rules as set forth in Article 3 of the IITA, and the denominator of
which is the taxpayer’s total base income for the taxable year. Under this provision, only income that
would have been taxable by other states applying Illinois law is included in the numerator of the fraction
thereby increasing the credit limitation.
Under Article 3 of the IITA, nonresidents are allowed to allocate to Illinois 100 percent of the deduction
for alimony paid. See Lunding v. New York Tax Appeals Tribunal, 522 U.S. 287, 118 S.Ct. 766 (1998).
As a result, if STATE had adopted Article 3 of the IITA, the taxpayer’s alimony deduction would have
been allowed in full. Accordingly, the alimony deduction must be allocated to STATE in computing the
numerator of the taxpayer’s limitation fraction.
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,

Brian L. Stocker
Associate Counsel (Income Tax)