What does Illinois General Information Letter IT 19-0003-GIL conclude about Subtraction Modification (Retirement Income)?

Plain-English summary

A taxpayer planning a lump-sum 401(k) distribution asked the Illinois Department of Revenue how to handle two pieces of it on Form IL-1040: (1) employer stock (with its "net unrealized appreciation" cost basis) rolled into a taxable brokerage account, versus (2) the rest of the funds rolled into an IRA. The taxpayer specifically asked how future dividends on that employer stock, and any appreciation, should be deducted, and asked the Department to "issue a Private Letter Ruling" on both scenarios.

The Department responded with a General Information Letter (GIL) instead of a Private Letter Ruling, because — as the letter explains — the nature of the request and the facts supplied called for general guidance rather than a binding ruling. A GIL is issued under 2 Ill. Adm. Code 1200.120(b) and (c); it points the taxpayer to the relevant rules but is not a statement of Department policy and is not binding on the Department.

On the substance, the Department explained that Illinois allows a subtraction modification (i.e., a deduction from federal adjusted gross income on Form IL-1040) only for retirement income that falls under specific Internal Revenue Code sections: 402(a), 402(c), 403(a), 403(b), 406(a), 407(a), and 408. Those sections cover distributions from qualified and non-qualified retirement plans and IRAs. Because the dividends described in the request come from company stock sitting in an ordinary taxable brokerage account — not from a qualified plan or IRA distribution — those dividends do not qualify. The Department stated plainly that they "may not be deducted from adjusted gross income on your Form IL-1040."

The Department did not rule on the IRA-rollover scenario (the taxpayer's second question, about appreciation staying inside an IRA and being distributed tax-free later) or provide a definitive line-by-line answer on exactly where to report the dividends on the federal return. It only addressed the Illinois subtraction-modification question for the brokerage-account dividends, and it told the taxpayer that a binding Private Letter Ruling on the full fact pattern would require submitting the items listed in 86 Ill. Adm. Code 1200.110(b).

What this means for you

Retirees and individuals taking retirement distributions

If you take a lump-sum distribution from a 401(k) and move employer stock into a regular (non-IRA) taxable brokerage account, any dividends that stock later pays are ordinary investment income for Illinois purposes — not retirement income. You cannot subtract those dividends on Form IL-1040. The Illinois subtraction modification is reserved for amounts actually received as distributions under the listed retirement-plan and IRA provisions of the Internal Revenue Code.

Accountants and tax professionals

This GIL is a useful reminder that the Illinois retirement-income subtraction tracks specific IRC distribution sections (402(a), 402(c), 403(a), 403(b), 406(a), 407(a), 408), not "anything that originated from a retirement account." Once employer stock with net unrealized appreciation (NUA) treatment lands in a taxable brokerage account, its ongoing dividend stream is a separate item of investment income that does not carry over the retirement-income subtraction. Note that the Department did not address the NUA cost-basis mechanics themselves or the IRA-appreciation scenario — those questions were left open.

Taxpayers considering a Private Letter Ruling

The Department declined to issue a binding Private Letter Ruling here and issued a GIL instead. If you want a binding answer on your own specific facts (including scenarios like the IRA-rollover appreciation question this taxpayer also raised), you need to submit a request containing all the information described in 86 Ill. Adm. Code 1200.110(b), items 1 through 8.

Common questions

Q: Can I subtract dividends from company stock on my Form IL-1040 if the stock came from a 401(k) rollover?
A: Not if the stock and its dividends sit in a regular taxable brokerage account. This GIL states those dividends "may not be subtracted" because they are not distributions under the IRC sections that qualify for Illinois's retirement-income subtraction.

Q: Which types of retirement income does Illinois actually allow you to subtract?
A: Income included in federal adjusted gross income under IRC §§ 402(a), 402(c), 403(a), 403(b), 406(a), 407(a), and 408 — generally distributions from qualified and non-qualified retirement plans and IRAs.

Q: Did the Department answer the taxpayer's question about IRA appreciation being distributed tax-free later?
A: No. The letter addresses only the taxable-brokerage-account dividend question. It does not confirm or deny the taxpayer's assumption about the IRA-rollover scenario.

Q: Why did the taxpayer get a GIL instead of the Private Letter Ruling they asked for?
A: The Department determined that the nature of the request and the information provided called for a General Information Letter rather than a binding ruling. A taxpayer who wants a binding ruling must submit the specific items required by 86 Ill. Adm. Code 1200.110(b).

Citations and references

Statutes and rules:

• IRC §§ 402(a), 402(c), 403(a), 403(b), 406(a), 407(a), 408 (retirement plan/IRA distributions eligible for the Illinois subtraction)
• 86 Ill. Adm. Code 1200.120(b), (c) (GILs are non-binding, not a statement of Department policy)
• 86 Ill. Adm. Code 1200.110(b) (information required to request a binding Private Letter Ruling)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2019.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2019/it19-0003-gil.pdf

Original ruling text

IIT 19-0003-GIL 02/11/2019 SUBTRACTION MODIFICATION (RETIREMENT INCOME)
Dividends from Taxable Brokerage Account may not be Subtracted. (This is a GIL)

February 11, 2019
Re: retirement income subtraction modification
Dear Xxxx:
This is in response to your letter dated September 19, 2018, in which you request information
regarding the subtraction modification for retirement income on your Form IL-1040. 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:
I plan to take a lump-sum distribution from 401(k) and distribute it to two
separate brokerage accounts:
• Taxable brokerage account contains all my company stock
• IRA brokerage account contains liquidated cash from rest of
cash/bond/mutual funds.
My employer will issue a 1099-R which contains cost basis of my employer stock
(net unrealized appreciation) and IRA rollover amount. At federal level, cost basis
of my employer stock will be taxed, but I can deduct it on Form IL-1040, Line 5.
Private Letter Ruling centers on my employer future annual dividend and sales of
company stock.
How/where to deduct my employer annual dividend on IL-1040? My brokerage
will issue Form 1099-DIV, and I will include on federal Form 1040, Line 13.
Have I opt for a total rollover from 401(k) to IRA, any stock appreciation would
be part of IRA balance. Any future distribution would be tax free from IL
(deducted on Form IL-1040, Line 5). Appreciation is part of IRA account balance.
Please issue a Private Letter Ruling for above two situations and advise
how/where to include/deduct them on Form IL-1040.
RULING
Illinois allows a subtraction modification for any retirement income included in adjusted gross
income under Sections 402(a), 402(c), 403(a), 403(b), 406(a), 407(a) and 408 of the Internal
Revenue Code. These generally cover distributions from qualified and non-qualified retirement

plans and individual retirement accounts. You have described receiving dividends from company
stock held in a taxable brokerage account. Those dividends may not be deducted from adjusted
gross income on your Form IL-1040 individual income tax return.
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 (312)
814-1722.
Sincerely,

Brian E. Fliflet
Deputy General Counsel, Income Tax
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