Nobody likes taxes. They are burdensome, expensive, and seem to rise every year. Why do we pay so much? For those in Illinois, this question might come up more than those who live elsewhere. So, what does it really look like for those of us who live here? What can you expect moving here? Where should I retire? And how do we rank compared to other states in the Unites States? I hope to generalize most of these complex questions into simple terms, and help you understand what it means to live in this expensive state.
State Tax Breakdown
There is no denying that we live in one of the most tax-oppressive states in the country. Chicago, being one of the largest and most populous cities in the U.S., dictates the majority of our state’s major taxes. Let’s jump right in. What does it cost to live here? How does this compare with other states in the U.S.?
Income tax – Simply, this is the amount of money that the government takes from your paychecks from hours worked at your job.
Illinois currently has a flat 5% income tax rate for every state resident. This means that if you were to make $100,000 in the year 2021, 5% would be removed as income tax by the state of Illinois. An additional federal effective tax rate of 15% would apply to this salary in Illinois, equating a grand total of 20% being removed in income tax. This makes Illinois one of the most expensive income tax states in the United States for those with lower or average salaries, but a reasonable state for those who make higher or much higher than the national averages.
Let’s compare this to other states’ averages. California, New York, Oregon, and New Jersey have maximum state income brackets near or over 10%. Even Iowa has a 9% income tax bracket for moderate to high earners. These states do not work in the best interest of their top earners but may be beneficial for those with average income or below.
Currently nine states have no income tax at all. A few of these include Florida, Texas, Washington, Nevada, and Alaska. These states could save you thousands of dollars per year in income tax alone
Property tax – Many people believe that states with no state income tax make up for this loss by raising property taxes, or taxes on land and home ownership. And this may be true, however:
The increase in property taxes from states with no income tax pales in comparison to the Illinois property tax average. At over 2.25%, Illinois has the second highest property tax in the United States.
Compare this to Florida at 0.89% and Texas at 1.80%. Clearly, the benefits of living in a state with no income tax continue to pay off more so than living in
Illinois.
A moderate average across the country lies around 1% or less, with the lowest rate at 0.28%
Social Security and Medicare tax – All 50 states require a 6.2% Social Security tax rate, and an additional 2.9% Medicare rate, but only a few of them tax benefits as income when they are taken out.
Fortunately, Illinois is not one of these states
The states that do include a Social Security withdrawal tax include CO, MN, WV, KS, CT, RI, UT, NE, MT, and VT.
Gas tax – A gas can be implemented to strengthen infrastructure, including public recreation, general roads, and highways. However, this can be taken advantage of as a means to simply tax more for less.
Illinois currently has the fifth highest gas tax in the United States at $0.39c/gallon, doubling from 2019’s $0.19c/gallon rate prompted by Governor Pritzker’s $45 billion infrastructure initiative.
This lags behind only California, Pennsylvania, New Jersey, and Washington, who see gas taxes anywhere from $0.45c/gallon to $0.51c/gallon
The national average lies around $0.20c/gallon
Sales tax – Sales tax involves the taxation of goods and services.
Illinois ranks #37 in the nation for best sales tax, at a rate of 6.25%. Only 13 states have a higher sales tax.
Some of these include CA, RN, RI, MS, NJ, MN, NV, WA, KS and a couple more.
The national average for sales tax lies around 4%, with states such as Oregon, New Hampshire, Montana, Delaware, and Alaska having no sales tax at all.
Local taxes play a significant role in sales tax as well, with Illinois having one of the highest average local taxes on sales in the country, shooting its combined sales and local tax into the fourth worst in the nation.
Capital Gains tax – This tax is federally implemented across all states for investment gains but is taxed additionally at varying rates across the state level.
The federal government will tax capital gains at a rate of 0%, 15%, or 20% for long-term investment sales (over 1 year) according to brackets. Low income earners may not be taxed on capital gains at all, while a high earner could be taxed 20% on gains.
Illinois will tack on an additional flat 4.95% tax to capital gains across the board, meaning that the highest earners for capital gains in this state would be taxed at least 25% on their long-term profits.
Short-term gains (<1 year) will be taxed as income according to tax bracket, which ranges from roughly 10% to 35%, meaning that a short-term sale from the highest earners in Illinois could have gains taxed at 40% or more.
Compare this to other states, and Illinois is roughly right in the middle of the pack. For large earners, the 5% additional tax may not be to terrible, especially if you consider states like California and New Jersey, who tax an additional 13.3% and 10.75%, respectively.
Hopefully this document opened your eyes to different taxes that come out of your paycheck. It is imperative to be educated about what your state is doing with your money, so that you can make responsible decisions with the money that you make. This may also help you realize that living in Illinois is a financial challenge. Living and working in this state is not cheap, and it a useful tool to compare differences across states to see if moving either for work or retirement is a good idea for you.
