Does gambling income won and taxed in another state increase an Illinois resident's credit for taxes paid to other states under IITA Section 601(b)(3)?

Plain-English summary

An Illinois resident wrote to the Department of Revenue after the state changed the taxpayer's return to disallow a credit claimed for gambling winnings earned in other states. The taxpayer had received W-2Gs (gambling winnings statements) from Indiana and Iowa, paid state income tax to those states on that income, included the winnings in Illinois income as required, and then claimed a credit on Schedule CR for the taxes paid to Indiana and Iowa. The taxpayer could not obtain a refund of the tax paid to those states and argued that disallowing the Illinois credit amounted to double taxation on the same income.

The Department explained that the credit for taxes paid to other states, found at Section 601(b)(3) of the Illinois Income Tax Act (35 ILCS 5/601(b)(3)), is not unlimited. For tax years ending on or after December 31, 2009, the credit is capped by a fraction: the numerator is the amount of the taxpayer's base income that would be allocated or apportioned to other states if those states had adopted Illinois' own allocation and apportionment rules (Article 3 of the IITA), and the denominator is the taxpayer's total base income for the year. Only income that would have been taxable by other states under Illinois' own rules counts toward increasing the credit limitation.

Applying that framework, the Department pointed to IITA Section 301(c)(2), which provides that gambling income of a nonresident is not allocated to Illinois. Because Illinois itself would not tax a nonresident's gambling winnings, the Department reasoned that if Indiana and Iowa had used Illinois' allocation rules, they likewise would not have taxed the gambling income. As a result, the gambling income could not be added to the numerator of the limitation fraction. Assuming none of the taxpayer's other base income was apportioned to other states, the credit for the Indiana and Iowa taxes paid on the gambling winnings was limited to $0.

The letter closes by reminding the taxpayer that a General Information Letter does not state Department policy and is not binding, and that the taxpayer could request a binding Private Letter Ruling on the specific facts by submitting the information required under 86 Ill. Adm. Code 1200.110(b).

What this means for you

If you win gambling income taxed by another state

Illinois residents who win gambling income out of state, receive a W-2G, and pay tax to that other state should not assume a dollar-for-dollar Schedule CR credit will offset that out-of-state tax. Under IITA Section 601(b)(3), the credit is capped using a fraction based on what income would be allocable to other states under Illinois' own apportionment rules — and IITA Section 301(c)(2) treats nonresident gambling income as not allocated to Illinois. Because of that specific carve-out, gambling winnings taxed by another state generally will not increase the credit-limitation fraction, and the allowable credit for taxes paid on that gambling income can be as low as $0.

If you disagree with how a credit was limited

This GIL is not binding on the Department and does not resolve a specific taxpayer's case. A taxpayer who wants a binding determination on their own facts can request a Private Letter Ruling by submitting the information described in items 1 through 8 of 86 Ill. Adm. Code 1200.110(b), rather than relying on general information alone.

Common questions

Q: Why was the Schedule CR credit for taxes paid to Indiana and Iowa reduced to zero?
A: Because the income at issue was gambling winnings, and IITA Section 301(c)(2) does not allocate a nonresident's gambling income to Illinois. Since that income would not have been taxable by other states if they applied Illinois' own allocation rules, it could not be counted in the numerator of the Section 601(b)(3) credit-limitation fraction, and (assuming no other apportionable income) the credit was limited to $0.

Q: Doesn't this result in paying tax on the same income twice — once to Indiana/Iowa and once to Illinois?
A: The letter does not dispute that the taxpayer paid tax to Indiana and Iowa and also included the income in Illinois base income. It explains, however, that the IITA Section 601(b)(3) credit is a limited credit governed by a specific statutory formula, and that formula — combined with the Section 301(c)(2) nonresident-gambling-income allocation rule — produced a $0 credit for the gambling income in this case.

Q: Is this letter a final, binding determination on the taxpayer's account?
A: No. The letter states it is a General Information Letter under 86 Ill. Adm. Code 1200.120(b) and (c), which is not a statement of Department policy and is not binding on the Department. A taxpayer seeking a binding answer on their specific facts may request a Private Letter Ruling under 86 Ill. Adm. Code 1200.110(b).

Q: What statute sets the general rule for the credit for taxes paid to other states?
A: 35 ILCS 5/601(b)(3) (IITA Section 601(b)(3)), which credits Illinois residents for income taxes paid to other states on income also taxed by Illinois, subject to a limitation formula tied to Article 3 allocation and apportionment rules.

Citations and references

• 35 ILCS 5/601(b)(3) — Illinois Income Tax Act credit for taxes paid to other states, including the post-2009 credit-limitation fraction.
• 35 ILCS 5/301(c)(2) — Illinois Income Tax Act provision under which gambling income of a nonresident is not allocated to Illinois.
• 86 Ill. Adm. Code 1200.120(b) and (c) — governs General Information Letters as non-binding general information.
• 86 Ill. Adm. Code 1200.110(b) — items required to request a binding Private Letter Ruling.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2017/it-17-0005-gil.pdf

Original ruling text

IT 17-0005-GIL 04/28/2017 CREDITS – FOREIGN TAX
Gambling Income Taxable in Other State Does Not Increase Credit Limitation Under IITA
Section 601(b)(3). (This is a GIL.)

April 28, 2017
Re:

Illinois income tax

Dear Xxxxx:
This is in response to your letter received August 29, 2016, 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:
My tax return was changed for a credit claimed from gambling winnings earned in another
state. I earned and reposted $$$ of W-2Gs from IN and IA and paid $$$ of state income taxes
to those states. I properly included the income on my Illinois return and claimed a state tax
credit of $$$ on Schedule CR. I am not allowed to file or claim a refund from those states.
Pursuant to the IL Income Tax Act (35 ILCS 5.601(3) “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 tax imposed by subsections 201(a) and (b) of this Act shall
be credited against the tax imposed…”
After extensive research, I cannot find an IL legal statute, revenue ruling or amendment
allowing double taxation on IL residents for this type of income. By disallowing my lawful credit,
I am effectively being required to pay state income taxes twice on the same source of income.
Once to the state of Indiana and Iowa where it was earned/won and withheld; and again to
Illinois based on my Federal AGI which includes this income.
I respectfully request this credit be allowed and my IL tax account be restated to zero. I
respectfully request something in writing documenting and proving that I am legally subject to
double taxation by both states. Why is the legal statute under the IL Tax Act difficult or
impossible to find despite my extensive research?
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 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 IITA Section 301(c)(2), gambling income of a nonresident is not allocated to Illinois. As a
result, if all other states had adopted IITA Section 301(c)(2), your gambling income would not have
been taxable in such other states. Therefore, your gambling income is not added to the numerator of
the limitation fraction. Assuming that none of your other base income would be allocated or
apportioned to other states applying Illinois law, your credit is limited to $0.
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)