Can annualizing income let a taxpayer avoid Illinois's $250,000 standard-exemption cutoff, and are Form IL-2210's annualization percentages correct?

Plain-English summary

An Idaho-based CPA who prepares his elderly Illinois-resident mother's tax return wrote to the Illinois Department of Revenue (IDOR) about what he believed were two errors on the 2021 Form IL-2210, the form used to compute penalties for underpaying estimated tax. Because a lot of his mother's investment income arrives in December, he wanted to know whether she could use the form's annualization worksheet to qualify for Illinois's standard exemption in the earlier installment periods, even though her full-year income would eventually exceed $250,000. He also flagged what he thought was a math error in the "applicable percentage" figures printed on the form.

IDOR rejected both claimed errors, though it clarified a related nuance on the first point.

On the exemption question: IITA Section 204(g) disallows Illinois's standard exemption entirely (no phase-out) once a taxpayer's federal adjusted gross income for the full taxable year exceeds $250,000 (single, head of household, married filing separately, or widowed) or $500,000 (married filing jointly). Because IITA Section 203(e) ties Illinois's adjusted gross income and taxable income definitions to the federal return, this is a full-year federal AGI test — not a test based on the annualized Illinois base income a taxpayer calculates on Line 38/40 of the IL-2210 annualization worksheet. So annualizing income cannot let a taxpayer dodge the exemption disallowance. However, IDOR pointed out a distinct, narrower calculation that the annualization worksheet does require: to fill in Line 41 (the exemption allowance) correctly for each period-column, a taxpayer must figure out what their federal AGI would have been if they'd filed a return for just that stub period (the first 3, 5, or 8 months). If that period's AGI exceeds $250,000, the exemption is disallowed for that column's Line 41 entry; if it doesn't, the exemption is allowed for that column. That column-by-column Line 41 calculation is different from — and shouldn't be confused with — the full-year threshold question the CPA was actually asking about.

On the percentages: Form IL-2210, Step 6, Line 48 shows applicable percentages of 22.5%, 45%, 67.5%, and 90% for the four installment columns. The CPA assumed these should be a straight-line fraction of 90% based on months elapsed (e.g., 0.90 × 5/12 = 37.5% for the 5-month column, rather than the 45% printed). IDOR explained the percentages are correct as printed: IITA Section 804(c)(2)(C) sets a fixed statutory "applicable percentage" tied to which required installment (1st, 2nd, 3rd, or 4th) is being computed, not to a linear scaling of months elapsed. IDOR walked through the underlying installment-due-date and applicable-period rules (IITA Sections 803(d)/(g) and 804(c)(2)(D)(i), and 86 Ill. Adm. Code 100.8010) to show the form's math is right and the CPA's recomputed figures rested on a mistaken premise about what the percentage represents.

What this means for you

High-income individual taxpayers and retirees with lump-sum or year-end investment income

If most of your income (dividends, capital gains, required minimum distributions, etc.) arrives late in the year, you cannot use Form IL-2210's annualization worksheet to avoid Illinois's standard exemption cutoff for the year as a whole. The cutoff is driven by your total federal AGI for the full year: if it tops $250,000 (or $500,000 for joint filers), the exemption is disallowed in full on your Form IL-1040, with no phase-out and no annualization escape hatch. Where annualization does matter is in filling out Line 41 of the worksheet itself: for each period-column, you separately test whether your AGI for just that stub period would have exceeded $250,000, which can make the exemption allowed in some columns and disallowed in others even though the full-year answer is already fixed.

Tax preparers and CPAs completing Form IL-2210

Keep the two calculations conceptually separate when you prepare a return: (1) the full-year federal AGI threshold under IITA Section 204(g), which determines whether your client gets any standard exemption at all on Form IL-1040, Line 10, and (2) the period-by-period hypothetical AGI test used only to populate Line 41 of the annualization worksheet, column by column. Don't treat a low annualized amount in an early column as evidence the client is exempt from the $250,000 rule overall. Also, do not recompute Line 48's applicable percentages — 22.5%, 45%, 67.5%, and 90% are the correct statutory figures from IITA Section 804(c)(2)(C), tied to which installment (1st through 4th) is due, not to a straight 90%-times-months-elapsed formula. Using self-corrected percentages would produce an inaccurate underpayment-penalty computation.

Common questions

Q: If most of a taxpayer's income comes in late in the year, can annualizing it help them qualify for the standard exemption?
A: No, not for purposes of the full-year exemption disallowance. IITA Section 204(g) disallows the exemption entirely once full-year federal AGI exceeds $250,000 (or $500,000 for joint filers), and that test uses the federal AGI reported for the whole taxable year — not the annualized Illinois base income calculated on the IL-2210 worksheet.

Q: Then why does the IL-2210 annualization worksheet ask about exemptions column by column on Line 41?
A: That is a separate, narrower calculation. For each period-column (first 3, first 5, first 8, and all 12 months), the taxpayer figures out what their federal AGI would have been if they had filed a return for just that stub period. If that period's hypothetical AGI is under $250,000, the exemption is included in that column's Line 41 amount; if it's over $250,000, it's excluded for that column. This doesn't change or override the full-year exemption disallowance determined separately on Form IL-1040.

Q: Are Form IL-2210's Line 48 applicable percentages (22.5%, 45%, 67.5%, 90%) actually a math error, as one taxpayer's preparer suspected?
A: No. IDOR confirmed these percentages are correct as printed. They come directly from the fixed statutory schedule in IITA Section 804(c)(2)(C), which assigns a set percentage to each of the four required installments, not from a straight-line formula based on the number of months elapsed in the year.

Q: Why did the preparer's recomputed percentages (37.5% and 60%) come out wrong?
A: He assumed the percentage represented 90% scaled proportionally by months elapsed (e.g., 0.90 × 5/12). That is not how the statute defines the applicable percentage. IITA Section 804(c)(2)(C) simply assigns 22.5%, 45%, 67.5%, and 90% to the 1st, 2nd, 3rd, and 4th required installments, respectively, regardless of a separate months-elapsed calculation.

Q: Is this ruling legally binding on the Department?
A: No. It is a General Information Letter (GIL), issued under 2 Ill. Adm. Code 1200.120(b) and (c). A GIL only directs a taxpayer to relevant regulations and sources of information; it is not a statement of Department policy and is not binding on IDOR.

Citations and references

Statutes and rules:

• IITA Section 201 (imposition of Illinois income tax)
• IITA Section 202 (definition of net income)
• IITA Section 203(e) (Illinois AGI/taxable income tied to the federal return)
• IITA Section 204(g) (standard exemption disallowed above $250,000 single/$500,000 joint federal AGI, no phase-out)
• IITA Section 802(c)(2)(A) (annualized income installment)
• IITA Section 803(d), (g) (estimated tax installment due dates for calendar-year and fiscal-year individuals)
• IITA Section 804(c)(1) (required installment)
• IITA Section 804(c)(2)(C) (statutory applicable percentage by installment: 22.5%/45%/67.5%/90%)
• IITA Section 804(c)(2)(D)(i) (applicable period for annualized installment)
• 86 Ill. Adm. Code 100.8010 (estimated tax computation, including subsections (c)(1)(A), (c)(1)(C), and (d)(1)-(2))

Source

Annualization - Installment Computation

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2022.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2022/it22-0007-gil.pdf

Original ruling text

IT-22-0007 04/15/2022 ANNUALIZATION - INSTALLMENT COMPUTATION
Standard exemption is disallowed in the computation of annualization
installment if the adjusted gross income for that period exceeds IITA
Section 204(g) thresholds. (This is a GIL.)
April 15, 2022
Re:

Illinois income tax

Dear NAME:
This is in response to your letter dated March 10, 2022, 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 (“GIL”), which is designed to provide general information, is not
a statement of Department policy, and is not binding on the Department. See 2
Ill. Admin. 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 am writing about error presented in Illinois income tax Form IL-2210. I
have been directed by Illinois Department of Revenue to direct my
questions to your office.
Before discussing the matter further, it should be noted that I am a
resident of Idaho, but I have legitimate interests in discussing Illinois tax
matters. My mother lives in Illinois, and I prepare her tax returns. My
mother would be penalized for not paying estimated tax accurately. Thus, I
hope that you will accept my questions.
My questions on Illinois tax Form IL-2210 (Year 2021) concerns 1)
exemption/Line 39, 2) annualization for the tax payment/Line 55.
It is clear that a single filer taxpayer cannot get exemption when the
income reaches threshold of $250,000. When one annualizes the income,
a significant amount of investment income is received in December. As
long as the income is smaller than $250,000, can the taxpayer get
personal exemption in annualization of income as long as the income
does not reach the threshold (Line 40) in specific period?
In Line 55, there is inconsistency in the applicable percentage, Line 55
and Line 39 for columns B & C. The period for column B is first 5 months,
and the period for column C is first 8 months. The applicable percentage
for the first 5 months is 45% (clearly stated on Form 2210). 45% is based
on 6 months. The correct value

should be 0.90 x 5/12 = 0.375, or 37.5%. For column D, the applicable
percentage for the first 8 months is 67.5% (as stated on the Form 2210).
The value printed
(on line 48) is based on 9 months. The correct value is 0.9 x 8/12 = 0.60,
or 60%. (There is no issue with the applicable percentage for columns A
and D/Line 55.).
In view of these two errors, can the Department of Revenue penalize the
taxpayers for taking exemption in the period when income is lower than
$250,000? Are tax filers correct when they use correct value for the
applicable percentage, instead of incorrect value determined on Line 48,
when determining the estimated payment that is due? This impacts the
payment made for the estimated tax, and penalty imposed when the
estimated tax Department of Revenue would assess that more estimated
tax is due, when the correct value is lower.
I appreciate your time on this matter, and look forward to your response.
RULING
I. IL-2210 Annualization Worksheet - Exemption Allowance Calculation
A resident or nonresident is liable for Illinois income tax under Section 201 of the
Illinois Income Tax Act (“IITA”, 35 ILCS 5/101 et seq.) if they compute “net
income” as defined under Section 202 of the IITA. Section 202 defines net
income as “that portion of his base income for such year which is allocable to this
State under the provisions of Article 3, less the standard exemption allowed by
Section 204.”
Section 203(e) of the IITA provides as follows:
In general. Subject to the provisions of paragraph (2) and subsection
(b)(3), for purposes of this Section and Section 803(e), a taxpayer’s gross
income, adjusted gross income, or taxable income for the taxable year
shall mean the amount of gross income, adjusted gross income or taxable
income properly reportable for federal income tax purposes for the taxable
year under the provisions of the Internal Revenue Code.
Base income is defined in Section 203 of the IITA. The starting point in
calculating base income in the case of an individual is the taxpayer’s adjusted
gross income for federal income tax purposes. Line 1 of the 2021 Form IL-1040,
Individual Income Tax Return, instructs a taxpayer to enter the adjusted gross
income from the taxpayer’s federal return. If a taxpayer is not required to file a
federal income tax return, the Form IL-1040 instructions on page 7 advise the
taxpayer to use a federal Form 1040 as a worksheet to determine adjusted gross
income for Illinois purposes. The adjusted gross income is then modified by
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certain statutorily prescribed addition and subtraction modifications in order to
arrive at base income.
Section 204(a) of the IITA provides for the standard exemption allowance as
follows:
Allowance of exemption. In computing net income under this Act, there
shall be allowed as an exemption the sum of the amounts determined
under subsections (b), (c) and (d), multiplied by a fraction the numerator of
which is the amount of the taxpayer’s base income allocable to this State
for the taxable year and the denominator of which is the taxpayer’s total
base income for the taxable year.
Section 204(g) of the IITA provides as follows:
Notwithstanding any other provision of law, for taxable years beginning on
or after January 1, 2017, no taxpayer may claim an exemption under this
Section if the taxpayer’s adjusted gross income for the taxable year
exceeds (i) $500,000, in the case of spouses filing a joint federal tax return
or (ii) $250,000, in the case of all other taxpayers.
As these provisions indicate, the disallowance of the standard exemption is
based on federal adjusted gross income rather than Illinois base income and
applies in full once the adjusted gross income threshold is exceeded (i.e., there is
no phase-out). See additionally Section 102 of the IITA.
The instructions for the 2021 Form IL-1040 elaborate on the standard exemption
disallowance. Page 8 of the instructions outlines the income exceptions:
If your federal filing status is married filing jointly and your federal AGI is
greater than $500,000, you are not entitled to an exemption allowance on
Line 10. Enter “zero” on Line 10. If your federal filing status is single, head
of household, married filing separately, or widowed and your federal AGI
is greater than $250,000, you are not entitled to an exemption allowance
on Line 10. Enter “zero” on Line 10.
Section 1501(a)(23) of the IITA defines “taxable year” as the calendar year, or
the fiscal year ending during such calendar year, upon the basis of which the
base income is computed under the IITA. In the case of a return made for a
fractional part of a year, taxable year means the period for which such return is
made.
The instructions for the 2021 Form IL-1040 further elaborate on the taxable filing
period. In response to the question “When must I file” on page 4 of the
instructions, the answer specifies the Illinois filing period is the same as the
federal filing period. It is assumed that a taxpayer is filing Form IL-1040 for
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calendar year 2021 unless the taxpayer is filing for a fiscal year and indicates as
such in the space provided on the top of the return.
Taxpayers completing IL-2210, Computation of Penalties for Individuals, figure
any required installments of estimated tax for the taxable year in Step 2. If a
taxpayer’s income was not received evenly throughout the year and the taxpayer
chooses to annualize income, then the taxpayer must complete the annualization
worksheet in Step 6 of the IL-2210. The taxpayer would begin the annualization
worksheet by first entering the Illinois base income for each period on Line 38.
The IL-2210 instructions for Line 38 provide that “In Columns A through C, enter
the base income that you would have entered on Form IL-1040, Line 9, if you
completed a Form IL-1040 for the first three months, the first five months, and the
first eight months of the tax year. In Column D, enter the amount from your Form
IL-1040, Line 9” (emphasis added). Line 9 on the IL-1040 is the calculated
Illinois base income for the taxable year.
With regard to your first question, a taxpayer may not avoid the standard
exemption disallowance threshold on Line 10 of the Form IL-1040 by simply
computing base income using the annualized installment method on the IL-2210.
As previously discussed, the federal adjusted gross income reported on Line 1 of
the Form IL-1040 is the amount reported for the taxable year. The disallowance
of the standard exemption is based on this amount, not the calculated Illinois
base income on Line 9 of the Form IL-1040. Therefore, the amounts calculated
on Line 38 (Illinois base income for each period) and Line 40 (annualized
income) in the IL-2210 annualization worksheet are not applicable in the
determination of the disallowance of the standard exemption on Line 10 of the
Form IL-1040.
However, in order to enter the correct amount of exemption allowance in each
column for Line 41 on the IL-2210 annualization worksheet, a taxpayer would
need to consider the amount of adjusted gross income that would have been
entered on Line 1 of the Form IL-1040 if the taxpayer had filed a return for the
first three months, the first five months, and the first eight months of the tax year.
If the adjusted gross income used to compute Line 38 base income for a period
on the annualization worksheet exceeds $250,000 for taxpayers other than
spouses filing a joint return, then the standard exemption is disallowed in the Line
41 exemption allowance calculation for that period. If the adjusted gross income
used to compute Line 38 base income for a period does not exceed $250,000 for
taxpayers other than spouses filing a joint return, then the standard exemption
amount may be included in the Line 41 exemption allowance calculation for that
period. The instructions for Line 41 on the IL-2210 contemplate that exemption
allowance amounts may change through the year: “Enter the amount in each
column that you would have entered as your exemption allowance on Form IL1040, Line 10, as if you had completed a Form IL-1040 at the end of each period.
If your number of exemptions changed during the tax year, determine the

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exemption allowance that you were entitled to claim at the end of each period.
Enter this amount in the appropriate column.”
II. IL-2210 Annualization Worksheet - Applicable Percentages
Pursuant to Section 803(d) of the IITA and 86 Ill. Admin. Code 100.8010(c)(1)(A),
when the taxable year consists of a calendar year, installments of estimated tax
for individuals are to be made on or before each of the following dates: April 15
of that taxable year, June 15 of that taxable year, September 15 of that taxable
year, and January 15 of the immediately succeeding taxable year. When the
taxable year consists of a fiscal year, Section 803(g) of the IITA and 86 Ill.
Admin. Code 100.8010(c)(1)(C) require installments of estimated tax for
individuals to be made on or before each of the dates that corresponds with the
15th day of the 4th, 6th, and 9th months of the taxable year, and the 15th day of the
first month following the end of the taxable year. These installment due dates
are reflected on Form IL-2210, Step 2, Line 9a, Columns A through D.
If the taxpayer establishes that the annualized income installment (as determined
in accordance with Section 804(c)(2) of the IITA and 86 Ill. Admin. Code
100.8010(d)(2)) is less than the required installment computed under Section
804(c)(1) and 86 Ill. Admin. Code 100.8010(d)(1), then Section 802(c)(2)(A) of
the IITA provides the annualized income installment to be the required
installment.
Section 804(c)(2)(D)(i) of the IITA provides the annualized installment applicable
period for an individual to be all the months of the taxable year that end prior to
the installment due date for which the annualized net income installment is
computed. Therefore, the annualized installment applicable periods for
individuals are the first 3 months, first 5 months, first 8 months, and all 12 months
of the taxable year. These applicable periods are shown on Form IL-2210, Step
6, Columns A through D.
Section 804(c)(2)(C) of the IITA provides as follows:
Applicable Percentage.
In the case of the following required installments:
required % is:
1st
2nd
3rd
4th

The applicable
22.5%
45%
67.5%
90%

These applicable percentages are correctly shown on Form IL-2210, Step 6, Line
48, Columns A through D. Therefore, a taxpayer should use the applicable
percentage amounts shown on Line 48 to calculate the annualized installment
amounts for each applicable period of the taxable year.
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As stated above, this is a GIL. A GIL does not constitute a statement of
Department policy that applies, interprets or prescribes the tax laws, and it is not
binding on the Department.
Sincerely,
Jennifer Uhles
Associate Counsel (Income Tax)

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