Building wealth requires strategy, discipline, and diligence. One of the most key details for those building wealth is ensuring decisions are made on a tax-efficient basis. After all, the less that goes to paying taxes, the more available for growth and long-term compounding. For all investors, managing the effects of taxation has a significant impact on the value of their portfolios.
Several considerations in this regard are specific to Illinois residents. Keeping those considerations in mind when making investment decisions helps Illinois residents retain more of their assets.
Taxation in Illinois
As one of the 41 states that impose their own income tax, Illinois ranks in the mid-range, with a flat personal income tax rate of 4.95%. Trusts and Estates pay a combined effective income tax rate of 6.45%, made up of a 4.95% rate, plus a 1.5% replacement tax.
Retirement Income and Taxation in Illinois
Most significant for retired Illinois residents is that the state imposes no tax on retirement income of any kind. This includes Social Security and pension benefits as well as income from retirement accounts such as 401(k)s, 403(b)s, and IRAs. Thus, the more Illinois residents can prioritize income from these sources in their retirement plans, the less Illinois tax they will pay on their retirement income.
Estate Taxation in Illinois
Though the federal exemption from estate and wealth-transfer taxes, at $15 million per individual in 2026 ($30 million for couples) is high enough so that many estates will not be affected, the barrier in Illinois is much lower. The state imposes a tax ranging from 0.8% to 16% on estates of $4 million or more. This means that wealthy Illinois families who wish to avoid or minimize the impact of taxes on their estates have a much lower threshold to consider in their estate planning strategies. Annual gifting, various trust types, and certain uses of life insurance can help mitigate some of the effects of state taxation on estates.
Tax-Exempt Income
For Illinois residents concerned with taxation on their incomes, investing in tax-exempt sources deserves careful consideration. Municipal investments typically are exempt from Federal income taxes. However, unlike most states, Illinois taxes interest on most all of its state issued municipal bonds. Should Illinois state income tax exempt investments be desired, research is necessary to identify and locate such bonds.
Interesting Illinois Tax Saving Nuance
Historically, Abbott Laboratories, Abbvie and Caterpillar have been designated as qualifying “High Impact Businesses” which allows the common stock dividends of these corporations to be exempt from Illinois state income taxes.
Getting Help from Your Advisor
Your Rothschild advisor is a primary resource for building tax efficient investment arrangements. Our clients rely on Rothschild to develop individualized strategies intended to provide long-term growth and reliable income streams for retirement and other purposes.
Disclosure: This content is informational only. Clients should consult with their own tax, legal, and financial specialists before acting on any information contained herein.
