Does a non-resident Illinois taxpayer have to prorate (reduce) their standard exemption when some of their income comes from outside Illinois?

Subject

Exemptions – Standard Exemption

Plain-English summary

This is a General Information Letter (GIL) -- not binding on the Illinois Department of Revenue and not a statement of Department policy. The taxpayer had actually asked for a binding Private Letter Ruling, but the Department decided the nature of the request called for a GIL instead.

The taxpayer was a non-resident individual and a beneficiary of a trust holding farmland in Illinois, receiving half of the trust's income each year. As a non-resident, the taxpayer had to file Form IL-1040-NR and Schedule NR, and noticed that the standard exemption on those forms came out lower than the full exemption amount residents get. The taxpayer argued this proration was unfair, and possibly unconstitutional, because it effectively taxed income earned entirely outside Illinois (like out-of-state rental income and interest) by shrinking the exemption available against Illinois-source income. The taxpayer asked the Department to rule that non-residents are entitled to the same, full, non-prorated exemption as residents.

The Department disagreed. It explained that under IITA Section 204(a) (35 ILCS 5/204(a)), the standard exemption is always calculated by multiplying the base exemption amount by a fraction -- the taxpayer's Illinois-allocable base income divided by their total base income. If a taxpayer's total base income is greater than their Illinois income, the taxpayer must prorate their standard exemption to account for income from sources outside Illinois. The Department noted that the IL-1040 and Schedule NR forms and instructions correctly reflect this statutory formula, and that unless a court declares Section 204(a) unconstitutional or the General Assembly amends it, the Department must implement the law as written and cannot change its regulations or forms to depart from the statute.

What this means for you

Non-resident taxpayers with Illinois-source income

If you're a non-resident who earns some income from Illinois sources (for example, as a trust beneficiary, from Illinois rental property, or from an Illinois business) and also earns income from other states, expect your standard exemption on Schedule NR to be prorated. The proration multiplies the full exemption amount by the fraction: Illinois-allocable base income ÷ total base income. The more of your income that comes from outside Illinois, the smaller your usable exemption becomes.

Residents vs. non-residents in practice

The statute's proration formula technically applies to every taxpayer, resident or non-resident. But because a full-year Illinois resident's Illinois-allocable base income and total base income are typically the same number, the fraction comes out to 1 and residents generally receive the full exemption amount. Non-residents (and part-year residents) with income both inside and outside Illinois are the ones who see a fraction less than 1, and therefore a reduced exemption.

Accountants and tax professionals advising non-resident filers

When preparing Schedule NR for a non-resident client, the exemption proration is not optional or discretionary -- it flows directly from IITA Section 204(a) and 86 Ill. Adm. Code 100.2055, and the Department has confirmed the IL-1040/Schedule NR line-by-line computations correctly implement that formula. If a client wants to challenge the fairness or constitutionality of the proration itself, understand that a GIL cannot resolve that; only a court ruling or legislative amendment could change the outcome, since the Department is bound to apply the statute as written.

Common questions

Q: Does the standard exemption proration only apply to non-residents?
A: No, by its terms IITA Section 204(a) applies the same fractional formula to all taxpayers. In practice, though, it usually only reduces the exemption for non-residents (and part-year residents) because a full-year resident's Illinois income and total base income are typically identical, making the fraction equal to 1.

Q: Why did the taxpayer get a General Information Letter instead of the Private Letter Ruling they asked for?
A: The Department stated that "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 and, unlike a PLR, is not a statement of Department policy and is not binding on the Department. See 2 Ill. Adm. Code 1200.120(b) and (c).

Q: Did the Department find the proration unfair or unconstitutional?
A: No. The Department did not rule on the constitutionality argument. It simply explained that Section 204(a) requires proration when total base income exceeds Illinois income, and that "[u]nless and until Section 204(a) is ruled unconstitutional or is amended by the General Assembly, the Department is required to implement the law as written and may not amend its regulations and forms in a manner contrary to the statute."

Q: Were the IL-1040 and Schedule NR forms computing the exemption incorrectly?
A: No. The Department confirmed that "[t]he IL-1040, IL-1040 Schedule-NR and associated instructions reflect this statutory requirement" -- meaning the forms correctly implement the Section 204(a) proration formula, contrary to the taxpayer's argument that the forms didn't comply with the statute.

Q: Can this letter be relied on by other taxpayers?
A: No. As a GIL, it "does not constitute a statement of policy that applies, interprets or prescribes the tax laws, and it is not binding on the Department." A taxpayer who is not under audit and wants a binding answer must submit a full Private Letter Ruling request under 2 Ill. Adm. Code 1200.110(b).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2021.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2021/it21-0009-gil.pdf

Original ruling text

IT-21-0009 11/23/2021 EXEMPTIONS – Standard Exemption
If a taxpayer’s total base income is greater than their Illinois income, the
taxpayer must prorate their standard exemption to account for income
from sources outside of Illinois. (This is a GIL)
November 23, 2021
Re: Illinois income tax
Dear NAME:
This is in response to your letter dated February 16, 2021, in which you
requested a Private Letter Ruling. 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:
This letter is to request that the Illinois Department of Revenue
("Department") issue Taxpayer (as defined herein) a Private Letter Ruling
("PLR") for the full amount of Illinois exemption allowance pursuant to 2
Ill. Admin. Code§ 1200.110, and in accordance with the advice of the IL DOR
Taxpayer Assistance - Call Center.
A. Statement of Facts
1.

Taxpayer Information:
a. This request for a Private Letter Ruling (PLR) is being made
by the taxpayer INDIVIDUAL, NAME SSN /TIN XXX-XX-XXXX (herein
"Taxpayer").
b. This Private Letter Ruling ("PLR") is not requested with regard
to hypothetical or alternative proposed transactions.
c. This PLR is requested to determine the fairness, legality and
constitutionality of tax consequences of IL Department of Revenue rules
pertaining to "non-resident apportioned standard exemptions". (Title 86
Part 100 Section 100.2055 Standard Exemption).
d. The INDIVIDUAL Taxpayer is not currently under audit or
under any other type of litigation with the IL Department of Revenue on
this matter or any other Tax matter.
e. The IL Department of Revenue has not previously ruled
regarding this matter for the INDIVIDUAL taxpayer. In addition, the
taxpayer has not submitted any similar request on this same issue
previously with the IL Department of Revenue, other than making inquiries
regarding this issue (by email) to the DOR.

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f. Taxpayer requests that his name, address, SSN, any other
personally identifying information (including the Taxpayer email address and
phone number), and any attached Exhibits be deleted from this PLR prior to
making it public information.
g. Taxpayer is not aware of any authority contrary to the authorities
cited herein.
2.

Description of Taxpayer's Tax Situation/ Description of Issue:

Taxpayer is a non-resident individual taxpayer and beneficiary of a Trust
Estate (herein "Trust”) established in the State of Illinois. This Trust is
approximately AMOUNT acres of income generating farmland located in
COUNTY Illinois. The beneficiaries (Taxpayer and Taxpayer's sibling)
equally receive ½ of the annual income from the Estate Trust. Taxpayer, as
a non-resident, is subject to the Illinois "pass through taxation” on such
beneficiary's share of Trust income.
As a non-resident taxpayer, Taxpayer is required to file form IL 1040-NR as
part of Taxpayer's annual Illinois tax return. However, although Taxpayer,
being a non-resident, is NOT required to file an Illinois Tax return, Taxpayer
is permitted to file a Illinois tax return to claim any refund that may be due.
As a non-resident, Taxpayer IS subject to mandatory pass through tax
withholding.
states:

Section 100.2055 Standard Exemption (UTA Section 204), in relevant part,
a) In computing net income, there shall be allowed as an exemption the sum
of the basic amounts provided under subsections (b) and (c) plus the
additional exemptions allowed under subsection (d), multiplied by a fraction,
the numerator of which is the amount of the taxpayer's base income
allocable to this State for the taxable year and the denominator of which is
the taxpayer's total base income for the taxable year. (IITA Section 204(a)).

to:

b) Each taxpayer shall be allowed an exemption in the basic amount equal
1) in the case of an individual:
A) for taxable years ending prior to December 31, 1998, $1,000; (IITA
Section 204(b)).
B) for taxable years ending on or after December 31, 1998 and prior to
December 31, 1999, $1,300; (IITA Section 204(b)(1)).

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C) for taxable years ending on or after December 31, 1999 and prior to
December 31, 2000, $1,650;(11TA Section 204(b)(2)).
D) for taxable years ending on or after December 31, 2000, and prior to
December 31, 2012, $2,000; (IITA Section 204(b)(3)).
E) for taxable years ending on or after December 31, 2012 and prior to
December 31, 2013 and for taxable years beginning on or after June 1,
2017, $2,050; (IITA Section 204(b)(4)).
F) for taxable years ending on or after December 31, 2013 and on or before
December 31, 2023, $2,050 plus the cost-of-living adjustment under
subsection (e); and (IITA Section 204(b)(5)).
G) for taxable years ending after December 31, 2023, zero.
2) for taxable years ending on or after December 31, 1992, an individual
taxpayer whose Illinois base income exceeds the basic amount and who is
claimed as a dependent on another person's tax return under the Internal
Revenue Code shall not be allowed any basic amount under this subsection
(b).(IITA Section 204(b)), (Source: Amended at 44 Ill. Reg. 2845, effective
January 30, 2020).
The foregoing regulation(s) do not indicate that a non-resident taxpayer is
not entitled to the full exemption allowance. Indeed according to the first
paragraph in this regulation, all exemption allowances are to be computed
in the same manner, regardless of the taxpayer's location or Illinois
residency status:
a) In computing net income, there shall be allowed as an exemption the sum
of the basic amounts provided under subsections (b) and (c) plus the
additional exemptions allowed under subsection (d), multiplied by a fraction,
the numerator of which is the amount of the taxpayer's base income
allocable to this State for the taxable year and the denominator of which is
the taxpayer's total base income for the taxable year. (IITA Section 204(a)).
Illinois Individual Tax Return Form 1040 and Schedule NR
Line by line:
The Illinois form 1040 and Schedule NR computations do not comply with
the foregoing. "Step 4: Exemptions· on the Form 1040 instructs all filers to
list the full deduction allowance amount (line 10a). That full exemption
allowance amount, along with other exemptions amounts as indicated on
lines 1Ob and 10c are then added and the total is reflected on line 10.

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Line 11 then instructs residents to subtract the exemption allowance (a
minimum of the full allowance amount) from Line 9 (being the resident filer's
"Illinois Base Income"). Line 11 instructs non-residents to enter the
exemption allowance amount as calculated on schedule NR (Step 5 Tax
Calculations).
It is the Schedule NR Step 5 calculations which essentially cause nonresident filers to have a reduced exemption allowance amount which
subsequently (and unfairly, and perhaps unconstitutionally) results in higher
income tax amounts due to the State of Illinois.
Line by line:
Line 46 is the base income for tax purposes for a non-resident filer.
Line 47 is the non-resident filer's Federal AGI amount. As a non-resident of
Illinois, and receiving taxable income from source(s) both in and outside
Illinois, this amount will almost always be higher than the amount on line 46.
Line 48 is the product of dividing the filer's base Illinois income by the filer's
Federal AGI (dividing line 46 by line 47). This results in the fraction
mentioned in paragraph a) as noted previously.
Line 49 is the full exemption allowance amount.
Line 50 is the product of multiplying line 49 by the decimal on line 48. This
results in an exemption allowance which is LESS than the full allowance
amount which nearly all resident filers receive. Thus, when subtracting the
exemption allowance from the Illinois base income shown on line 46, the
result is a higher amount of taxable income taxed at the flat rate of 4.95%
applicable to all filers.
Analysis:
Pursuant to Section 100.2055 Standard Exemption (IITA Section 204), all
taxpayers, both resident and non-resident filers, are subject to the
exemption allowance rules. Paragraph a) computations, where applicable,
apply to nearly all Illinois tax return filers. Non-resident tax return filers,
particularly Taxpayer, pay additional Illinois income tax, based on
computations using revenues received from sources outside the State of
Illinois. Such additional revenues for Taxpayer include: interest earned on
investments, canceled debt "income· (which is not actual income, but
income for taxation purposes only), and rental property rent receipts (for
rental property located in Taxpayer's residency State of STATE). Taxpayer
pays more as a non­resident, on the same base income and resulting net
taxable income, than a resident taxpayer whose base and net taxable
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Illinois income is the same. The Illinois DOR tax return forms (1040 and
Schedule NR) do not figure exemption allowance fractions or reductions for
residents, but do for non-residents. Taxpayer is “penalized” for the income
received from sources outside Illinois, and is essentially taxed on a portion
of such income, based on reductions in the exemption allowance which are
applied directly due to such income.
Computations & Residency Status Comparison (2020 estimated
amounts)
(Figures Removed)
As clearly shown above, a Illinois resident receives the full exemption
allowance, regardless of the Illinois base income amount, and regardless of
where such income is earned; whereas Taxpayer's exemption allowance is
reduced, based solely on income received outside Illinois, and which
income is not subject to Illinois income taxation, resulting in an increased
net Illinois taxable income amount and corresponding higher amount of
income tax payable.
In fact, when one analyzes the Illinois tax forms, the Schedule NR line 47
amount includes the same amount of Illinois' portion of taxable interest as
contained on line 6, column 8 of that same form. That I to say, the column
8 amount is also included in the column A amount as shown on the
taxpayer(s)' federal 1040 return. In other words, that interest income is in
fact "taxed" twice.
Additional Information and Guidance
Taxpayers Bill of Rights (20 ILCS 2520/) Taxpayers' Bill of Rights Act.
(20 ILCS 2520/4) (from Ch. 120, par. 2304) Sec. 4. Department
responsibilities. The Department of Revenue shall have the following
powers and duties to protect the rights of taxpayers:
(a) To furnish each taxpayer with a written statement of rights whenever
such taxpayer receives a protestable notice, a bill, a claim denial or
reduction regarding any tax. Such statement shall explain the rights of such
person and the obligations of the Department during the audit, appeals,
refund and collections processes.
The exemption allowance is a “claim” on an individual tax return, the same
as any other income offsetting credit, reduction, or deduction. The Illinois
individual tax return forms (1040 and Schedule NR) computations do not
provide any notice that the exemption allowance is reduced for non-resident
filers. Indeed the IL 1040 form makes it appear as though a non-resident
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filer in fact receives the full exemption allowance amount, when in fact he
or she may not or does not.
IRS Publication 1 Right 10: The Right to a Fair and Just Tax System.
Taxpayers have the right to expect the tax system to consider facts and
circumstances that might affect their underlying liabilities, ability to pay, or
ability to provide information timely. Taxpayers have the right to receive
assistance from the Taxpayer Advocate Service if they are experiencing
financial difficulty or if the IRS has not resolved their tax issues properly and
timely through its normal channels.
Although the foregoing taxpayer right is that of the IRS and not a specifically
stated right of the Illinois DOR or the State of Illinois, the concept of a Fair
and Just tax system is contained in the Illinois Constitution, Article IX,
Sections 2 and 3:
SECTION
2.
NON-PROPERTY
TAXES
CLASSIFICATION,
EXEMPTIONS, DEDUCTIONS, ALLOWANCES AND CREDITS
In any law classifying the subjects or objects of non-property taxes or fees,
the classes shall be reasonable and the subjects and objects within each
class shall be taxed uniformly. Exemptions, deductions, credits, refunds and
other allowances shall be reasonable.
(Source: Illinois Constitution.)
Note: Income may very "Well be considered an "object". It is certainly
"subject" to, and the "subject” of, taxation.
SECTION 3. LIMITATIONS ON INCOME TAXATION
(a) A tax on or measured by income shall be at a non-graduated rate. At
any one time there may be no more than one such tax imposed by the State
for State purposes on individuals and one such tax so imposed on
corporations. In any such tax imposed upon corporations the rate shall not
exceed the rate imposed on individuals by more than a ratio of B to 5.
(b) Laws imposing taxes on or measured by income may adopt by reference
provisions of the laws and regulations of the United States, as they then
exist or thereafter may be changed, for the purpose of arriving at the amount
of income upon which the tax is imposed.
(Source: Illinois Constitution.)
The laws and regulations of the IRS do not contain any such "non-resident
apportioned standard exemptions" which are applicable to U.S. citizens who
are residents of varying States.

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United States Constitutional Impacts and Concerns; Case law
Federal constitutional rules generally require non-residents to be taxed as
favorably as residents. Three constitutional provisions, the Privileges and
Immunities Clause, the Commerce Clause, and the Equal Protection
Clause, may invalidate differential tax rules for nonresidents. In addition, a
nonresident must have sufficient contact with the state to be subject to tax
under the due process clause--e.g., a state's income tax can only apply to
a nonresident's income from in-state sources. The Privileges and
Immunities Clause provides The citizen of each State shall be entitled to all
of the Privileges and Immunities of Citizens of the several States. U.S.
Const. Art. IV § 2. The Privilege and Immunities Clause generally prohibits
a state from imposing higher tax rates or taxes on nonresidents than it
imposes on residents. Although its language refers to "citizens," the
Supreme Court has held that provisions discriminating against nonresidents
also discriminate against citizens of other states.
The clause does not absolutely prohibit discrimination against nonresidents;
it permits states to provide different rules for nonresidents if there is a "valid
independent reason for" the treatment. Also, it only applies to interests that
are "fundamental," i.e., bear on "the vitality of the Nation as a single entity."
A fee or tax on pursuing a trade or business is covered. Toomer v. Witsell,
334 U.S. 385, 395 (1948). Differential fees on nonresidents for recreational
hunting and fishing are not. Baldwin v. Fish and Game Commission of
Montana, 436 U.S. 371 (1978). In general, differential income or property
tax rules are covered, since they affect the right to "reside in" or '10 pursue
trade. agriculture. [or1 professional pursuits." Corporations are not
protected by the clause, since they are not considered "citizens." Examples
of laws held to violate the privileges and immunities clause include: •Denial
to nonresidents of personal deductions under the individual income tax.
Travis v. Yale & Towne Mfg. Co., 252 U.S. 60 (1920} (personal exemption):
Lunding v. N.Y. Tax Appeals Tribune, 522 U.S. 287(1998) (alimony
deduction). [MN House Research Department September 2018]
Requested Ruling:
Based on all of the above, Taxpayer requests that the Department rule that
Taxpayer is, pursuant to Section 100.2055 Standard Exemption (IITA
Section 204), and in compliance with the fair tax system concept, and
various provisions of the U.S. Constitution, entitled to the same tax
exemption allowance treatment and computations as are used for and with
Illinois resident tax return filers, using no decimal or fractional computations.
Taxpayer additionally request the IL DOR refigure Taxpayer's YEAR1 and
YEAR2 returns using the full exemption allowance amount, as granted to
Illinois residents, and refund the difference of what was already refunded
and what is due, with interest, to Taxpayer. If the Department proposes to
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rule other than as requested herein, Taxpayer respectfully requests the
Department to rule that Section 100.2055 Standard Exemption (IITA
Section 204) applies equally to all tax filers, resident and non­resident alike,
and that the same exemption allowance reductions apply to residents as
they are currently applied only to non-residents. And that the same be
specifically indicated in the Department's written rule(s) regarding
exemption allowance entitlement and computations, and the appropriate tax
forms be updated/revised accordingly.
Prior to publication Taxpayer respectfully requests that the Department
delete the name and any and all personal identifying information about the
Taxpayer contained herein.
Thank you for your most valuable time, consideration of, and attention to,
this request. I look forward to your response. In the interim, should you have
any questions or concerns or should you require additional information,
please do not hesitate to let me know.
RULING
A resident or nonresident is liable for Illinois income tax under Section 201 of the
Illinois Income Tax Act (“IITA” 35 ILCS 5/201) if they compute “net income” as
defined under IITA Section 202. IITA Section 202 defines net income as “that
portion of his base income for such year which is allocable to this State under the
provisions of Article 3, less the standard exemption allowed by Section 204.”
Section 204(a) of the IITA states as follows:
(a) Allowance of exemption. In computing net income under this Act,
there shall be allowed as an exemption the sum of the amounts determined
under subsections (b), (c) and (d), multiplied by a fraction the numerator of
which is the amount of the taxpayer's base income allocable to this State
for the taxable year and the denominator of which is the taxpayer's total
base income for the taxable year.
86 Ill. Adm. Code 100.2055, cited in your letter, directly cites to Section 204(a) of
the IITA. The IL-1040, IL-1040 Schedule-NR and associated instructions reflect
this statutory requirement. According to Section 204(a) to the IITA, the standard
exemption is calculated by multiplying the standard exemption determined under
Section 204(b), (c) and (d) by a fraction which reflects the ratio of "Illinois
income" to total base income. Consequently, if a taxpayer’s total base income is
greater than their Illinois income, the taxpayer must prorate their standard
exemption to account for income from sources outside of Illinois. Unless and
until Section 204(a) is ruled unconstitutional or is amended by the General
Assembly, the Department is required to implement the law as written and may
not amend its regulations and forms in a manner contrary to the statute.
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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) 7822844.
Sincerely,

Michael D. Mankowski
Associate Counsel - Income Tax
cc:

Daily File
Correspondence file:

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