If an Illinois resident moves abroad indefinitely for work but still receives K-1 income from his Illinois-based S corporation employer, is his foreign-earned income taxable by Illinois?

Subject

Residency

Plain-English summary

An Illinois-licensed professional wrote to the Illinois Department of Revenue on behalf of a client who had been an Illinois resident until 2007, when he moved with his family to a foreign country. The client works for his Illinois-based S corporation employer, in which he also holds an ownership interest, and he receives an annual K-1 that he uses to report Illinois income. He has not been a resident of another U.S. state (except while a college student), and he plans to live in another state — not Illinois — if he later moves his family back to the USA. His wife is a Brazilian national who has become a U.S. citizen.

The letter asked, in substance, whether the client's total earned wages while living in the foreign country are taxable in Illinois, and whether it is only the federal foreign earned income exclusion (reported on Form 2555) that would be excluded from Illinois tax.

Because of the nature of the request, the Department responded with a General Information Letter (GIL) rather than a Private Letter Ruling. The Department explained that under 35 ILCS 5/1501(a)(20)(A), an Illinois resident is someone who is in Illinois for other than a temporary or transitory purpose, or who is domiciled in Illinois but temporarily absent. Domicile, under 86 Ill. Adm. Code 100.3020(d), is the place where a person has voluntarily fixed their permanent home with the present intention of staying, until some unexpected event causes them to adopt another permanent home; a person loses Illinois domicile by (1) locating elsewhere with the intent to make that the new domicile, and (2) abandoning any intent to return to Illinois.

Applying that standard to the facts as given, the Department stated that the client moved abroad with his family in 2007 and has no intention of returning to Illinois. If that move was indefinite rather than temporary or transitory, it would indicate a change of domicile. On that basis, the Department concluded the client would still be taxable on his Illinois-source income (as reported on the Form K-1-P or otherwise) but would not owe Illinois income tax on the income he earned in the foreign country.

What this means for you

Individuals who move abroad but keep Illinois-source income

If you left Illinois with the intent to make your new location a permanent home and have abandoned any intention of returning, this GIL indicates the Department would treat you as having changed your domicile — meaning your foreign-earned income would not be taxable by Illinois. However, any Illinois-source income you continue to receive (for example, K-1 income from an Illinois-based employer or business you have an ownership interest in) would remain taxable by Illinois regardless of where you live.

Accountants and tax professionals

The Department's analysis turns entirely on the domicile test in 86 Ill. Adm. Code 100.3020(d): a client must have both (1) located elsewhere intending to make it a new domicile, and (2) abandoned any intent to return to Illinois. Note that the ruling is conditioned on the move being "indefinite and not temporary or transitory" — the Department did not independently verify that fact; it took the taxpayer's description of an open-ended, family relocation with no plan to return to Illinois at face value. The letter does not address the taxpayer's separate question about whether only the federal Form 2555 foreign earned income exclusion amount is excluded from Illinois tax, or resolve that point with any more specificity than "income earned in COUNTRY" generally.

Common questions

Q: Is income earned while living abroad taxable by Illinois?
A: Not if the taxpayer has actually changed domicile. The Department said that because the client moved abroad with his family in 2007 and has no intention of returning to Illinois, if that move was indefinite and not temporary or transitory, it would indicate a change of domicile — and income earned in the foreign country would not be taxable by Illinois.

Q: Does the taxpayer still owe Illinois tax on anything?
A: Yes. The Department stated the client "still would be taxable on his Illinois-source income as reported on the Form K-1-P or otherwise" even after establishing a new domicile abroad.

Q: What test does Illinois use to decide whether someone is still domiciled in Illinois?
A: Under 86 Ill. Adm. Code 100.3020(d), domicile is where a person has voluntarily fixed a permanent home with the present intention of staying there indefinitely. A person loses Illinois domicile by (1) locating elsewhere with the intention of making that the new domicile, and (2) abandoning any intention of returning to Illinois.

Q: Did the Department answer the taxpayer's question about the Form 2555 foreign earned income exclusion?
A: Not specifically. The taxpayer asked whether only the federal earned income exclusion reported on Form 2555 would be non-taxable in Illinois. The ruling instead answers more broadly, saying income earned in the foreign country is not taxable in Illinois if the domicile change occurred, without separately addressing the Form 2555 mechanics.

Q: Is this letter binding on the Illinois Department of Revenue?
A: No. It is a General Information Letter issued under 86 Ill. Adm. Code 1200.120(b) and (c). The letter itself states that a GIL "does not constitute a statement of policy that applies, interprets or prescribes the tax laws, and it is not binding on the Department."

Q: What happens if the taxpayer's move turns out not to have been "indefinite"?
A: The Department's conclusion is conditional: it applies "if the move was indefinite and not temporary or transitory." The ruling does not independently confirm this fact — it relies on how the requester described the situation. A taxpayer whose circumstances differ (for example, an intended or eventual return to Illinois) would need to reassess whether domicile actually changed.

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/it21-0001-gil.pdf

Original ruling text

IT 21-0001-GIL 04/14/2021 RESIDENCY
Income earned in a foreign country not taxable if taxpayer established a
new domicile. (This is a GIL.)
April 14, 2021
Re:

Illinois income tax

Dear NAME:
This is in response to your letter dated March 24, 2021, in which you request a
letter ruling regarding Illinois income tax law. The nature of your letter and the
information provided require that we respond with a General Information Letter
(GIL). A GIL 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 accessed from the Department’s web site at
www.ILtax.com.
Your letter states as follows:
My name is NAME a OCCUPATION licensed ##### in the state of Illinois.
I was advised by the person I talked to yesterday at the Illinois Department
of Revenue to contact the LEGAL SERVICES OFFICE as they could not
answer my question.
I have a client who was an Illinois resident until 2007 when he moved to
COUNTRY where he moved his family and works for his Illinois based S
Corporate employer. He also has an ownership interest in his employer
and receives an annual K-1 from which he uses to report ILLINOIS
income. The taxpayer also has not been a resident of another state except
when taxpayer was a college student. The taxpayer plans to live in
another state when he moves his family back to the USA. The wife of the
taxpayer is a Brazilian national and has become a USA citizen.
My questions are multiple:
•
•
•

Are taxpayer’s total earned wages (income) while in foreign country not
taxable in Illinois?
Taxpayer files a FORM 2555 with his Federal Tax Return. Is it only the
EARNED INCOME EXCLUSION that is not taxable in Illinois in
taxpayer’s situation?
Are the taxpayer’s total earned (income) wages not taxable in Illinois?

I look forward to receiving your supported answers and thank you in
advance.

RULING
Section 1501(a)(20)(A) of the Illinois Income Tax Act defines resident as “an
individual (i) who is in this State for other than a temporary or transitory purpose
during the taxable year; or (ii) who is domiciled in this State but is absent from
the State for a temporary or transitory purpose during the taxable year; . . . .”
Domicile “is the place in which an individual has voluntarily fixed the habitation of
himself or herself and family, not for a mere special or limited purpose, but with
the present intention of making a permanent home, until some unexpected event
shall occur to induce adoption of some other permanent home.” 86 Ill. Admin.
Code § 100.3020(d). An Illinois resident “loses Illinois domicile: 1) by locating
elsewhere with the intention of establishing the new location as his or her
domicile; and 2) by abandoning any intention of returning to Illinois.” 86 Ill.
Admin. Code § 100.3020(d).
Based on the information provided, your client moved to COUNTRY with his
family in 2007 and has no intention of returning to Illinois. If the move was
indefinite and not temporary or transitory, that would indicate a change of
domicile. Your client still would be taxable on his Illinois-source income as
reported on the Form K-1-P or otherwise but would not owe Illinois income tax on
income earned in COUNTRY.
As stated above, this is a GIL. A GIL does not constitute a statement of policy
that applies, interprets or prescribes the tax laws, and it is not binding on the
Department.
Sincerely,

Brian Fliflet
Acting General Counsel