I'm an Illinois resident who works part-time in another state and deduct student loan interest -- why does Illinois make me subtract that deduction from my out-of-state income when figuring my credit for taxes paid to that state?

Plain-English summary

An Illinois-resident teacher lives and works primarily in Illinois but also holds a part-time job at a retailer in another state. She has a student loan interest deduction from a master's degree in education she earned years ago. When she claims Illinois's resident credit for the income tax she paid to the other state on Schedule CR, the Department requires that her student loan interest deduction be subtracted from her out-of-state income (on Column B, Line 28 of Schedule CR) before the credit is calculated -- even though the other state's own nonresident return does not let her deduct that same student loan interest (student loan interest can only be deducted there by the other state's own residents). Her representative argued this was unfair: she actually paid tax to the other state on her full wages, without any student loan interest deduction reducing that income, so Illinois's approach understates the out-of-state income used in the credit computation and effectively denies her the correct credit.

The Department held that Schedule CR's treatment is correct. Under 35 ILCS 5/601(b)(3), the credit Illinois residents get for taxes paid to other states is capped by a fraction: the numerator is the taxpayer's base income that would be allocated or apportioned to other states if those states had adopted Illinois's own Article 3 allocation and apportionment rules, and the denominator is the taxpayer's total base income. The Department reasoned that under Lunding v. New York Tax Appeals Tribunal, 522 U.S. 287 (1998), a state cannot discriminate against nonresidents by denying them a deduction (there, alimony paid) that it allows its own residents. Because Illinois itself allows nonresidents to allocate the full student loan interest deduction to Illinois when computing their Illinois net income, the credit limitation fraction must assume, consistent with that same principle, that other states would likewise let the taxpayer deduct student loan interest in full. That means the student loan interest deduction is treated as allocated to the other state in the numerator of the fraction -- which reduces the out-of-state income figure used to compute the credit -- regardless of whether the other state's actual rules let her take that deduction on her nonresident return. The Department concluded that "the instructions to the Schedule CR, Credit for Taxes Paid to Other States, correctly apply the statute."

What the Department didn't do. It did not change the Schedule CR treatment for this taxpayer, did not extend any exception because the deduction was unavailable on her actual nonresident return, and did not reconsider the fairness argument raised in her letter. As a GIL, this letter explains how the existing statute and the Lunding line of authority apply; it is not a statement of Department policy, is not binding on the Department, and does not bind the Department in any other taxpayer's case.

What this means for you

Illinois residents with a part-time or secondary job in another state

If you're an Illinois resident who works part time in another state and claim the Schedule CR resident credit for tax paid there, expect that any student loan interest deduction you claim will be subtracted from your out-of-state income for purposes of computing the credit limitation -- even if the other state's own nonresident tax rules don't actually allow you to deduct that same student loan interest.

Anyone claiming both a student loan interest deduction and the resident credit for taxes paid to other states

The credit limitation fraction in 35 ILCS 5/601(b)(3) is a hypothetical construct: it asks what your base income would be allocated to other states if those states used Illinois's own allocation and apportionment rules, not what those states' actual rules provide. Because Illinois lets nonresidents allocate the full student loan interest deduction to Illinois, the flip side is that Illinois residents must allocate that same deduction to other states when figuring the resident credit -- regardless of the other state's own deduction rules.

Accountants and tax professionals preparing Schedule CR

This GIL confirms the Department's position that Schedule CR Line 28's treatment of the student loan interest deduction is correct and grounded in Lunding. If a client's out-of-state return doesn't actually allow the same deduction, don't expect the Department to make an exception on that basis -- the fraction is computed using Illinois's own hypothetical allocation rules, not the other state's actual treatment.

Common questions

Q: Why does Illinois subtract my student loan interest deduction from my out-of-state income when computing my resident credit, even though the other state doesn't let me deduct it on my nonresident return there?
A: The Department says this is required by 35 ILCS 5/601(b)(3) as informed by Lunding v. New York Tax Appeals Tribunal. The credit limitation fraction assumes other states adopted Illinois's own allocation rules -- and since Illinois lets nonresidents allocate the full student loan interest deduction to Illinois, the same allocation must be assumed for residents' out-of-state income too.

Q: Does it matter that I couldn't actually claim the student loan interest deduction on my nonresident state return?
A: Not under the Department's reasoning here. The credit limitation fraction is based on a hypothetical -- what would be allocated to other states if they used Illinois's Article 3 rules -- not on what the other state's actual rules allow.

Q: What does the Lunding case have to do with a student loan interest deduction?
A: Lunding held that a state can't deny nonresidents a deduction (there, alimony) that it gives its own residents. Because Illinois already lets nonresidents allocate the full student loan interest deduction to Illinois under that principle, the Department applies the same logic in reverse: the deduction must be treated as allocated to the other state when an Illinois resident computes the credit for taxes paid there.

Q: Is this letter binding on the Department for other taxpayers with similar facts?
A: No. This is a General Information Letter, not a Private Letter Ruling -- it does not constitute a statement of Department policy and is not binding on the Department.

Citations and references

Statutes and cases:

• 35 ILCS 5/601(b)(3) (resident credit for taxes paid to other states; credit limitation fraction)
• Lunding v. New York Tax Appeals Tribunal, 522 U.S. 287 (1998)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2023.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2023/it23-0013-gil.pdf

Original ruling text

IT 23-0013-GIL 07/11/2023 ALLOCATION
General Information Letter: In computing the credit for taxes paid to other states,
residents are required to allocate credits to out-of-state income due to the United
States Supreme Court decision in Lunding v. New York Tax Appeals Tribunal.
July 11, 2023

NAME
ADDRESS
the
Dear NAME:
This letter is in response to your letter in which you requested information about
taking certain deductions on Schedule CR. The Department issues two types of letter
rulings. Private Letter Rulings (“PLRs”) are issued by the Department in response to
specific taxpayer inquiries concerning the application of a tax statute or rule to a
particular fact situation. A PLR is binding on the Department, but only as to the taxpayer
who is the subject of request for ruling and only to the extent the facts recited in the PLR
are correct and complete. Persons seeking PLRs must comply with the procedures for
PLRs found in the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose
of a General Information Letter (“GIL”) is to direct taxpayers to Department regulations
or other sources of information regarding the topic about which they have inquired. A
GIL is not a statement of Department policy and is not binding on the Department. See
2 Ill. Adm. Code 1200.120. You may access our website at www.tax.illinois.gov to
review regulations, letter rulings and other types of information relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we
respond with a GIL. In your letter you have stated and made inquiry as follows:
I am writing to you about Account ID P######## pertaining to
TAXPAYER(SSN XXX-XX-0123). The difference of opinion is about
student loan interest being included on Column B Line 28 of IL Schedule
CR.
TAXPAYER has always lived in Illinois and has been a teacher in Illinois
for many years. She has student loan interest because she received a
master's degree in education several years ago. She has also had a
part-time job in STATE at a RETAILER. In 2022 she was paid $$$$$
from her STATE employment. It seems IDOR is of the opinion on her IL
CR form that the student loan interest should be deducted on line 28
column B so her STATE income to compute the credit is only $$$$$.
I have included STATE tax forms and instructions. When she
completes her STATE IT-PNR form she cannot deduct student loan
interest. It can only be deducted for residents of STATE. She has to
pay tax on $$$$$ of income, not $$$$$. This makes common sense and

NAME
Page 2
July 11, 2023
follows STATE rules. IDOR feels she should receive a credit paid to
another state based on $$$$$ of income. This is not what occurred and
to me follows no logic. She had to pay STATE income tax on $$$$$ of
income. That was not a choice; it was a requirement. To compute an IL
credit based on $$$$$ does not make sense and is not fair.
I know the difference of opinion results in only a tiny difference in tax,
but TAXPAYER is concerned about the change to her tax return and
this change has occurred in other years as well. I would appreciate
your consideration to change the tax return to show a CR credit based
on $$$$$ of income and not subtract student loan interest.
Thank you in advance for any information you can provide.
DEPARTMENT’S RESPONSE:
Section 601(b)(3) of the Illinois Income Tax Act (35 ILCS 5/601) allows Illinois
residents a credit for taxes paid to other states. That section provides, in part:
[T]he 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.
In Lunding v. N.Y. Tax Appeals Tribunal, 522 U.S. 287 (1998), the United States
Supreme Court held that states could not discriminate against nonresidents by denying
them the same deduction for alimony paid that would be allowed to residents.
Accordingly, Illinois allows nonresidents to allocate the full amount of the deduction for
student loan interest to Illinois in determining their Illinois net income. Consistent with
this allocation, the limit on the credit for taxes paid to other states in Section 601(b)(3)
must be computed by allocating the deduction for student loan interest to other states
as if they followed the same allocation principles as Illinois. The instructions to the
Schedule CR, Credit for Taxes Paid to Other States, correctly apply the statute.
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.
I hope this information is helpful. If you require additional information, please
visit our website at www.tax.illinois.gov or contact the Department’s Taxpayer
Information Division at (217) 782-3336.
Very truly yours,

NAME
Page 3
July 11, 2023

Brian Fliflet
Deputy General Counsel