Capital gains tax is a levy on the profit realized from the sale of a non-inventory asset, such as stocks, bonds, real estate, or other investments, when the asset’s selling price exceeds its purchase price. For Illinois taxpayers, understanding how capital gains are taxed is crucial for effective financial planning and tax compliance.
Does Illinois Have a Capital Gains Tax?
Yes, Illinois taxes capital gains as part of its income tax system. The state imposes a flat income tax rate of 4.95% on both ordinary income and capital gains. This means that regardless of the amount of income or the nature of the income (whether it’s from wages, interest, dividends, or capital gains), the tax rate remains consistent.
Compared to other states, Illinois’ approach is relatively straightforward due to its flat tax rate. Some states have progressive tax rates or offer exemptions on capital gains, while others, like Illinois, tax capital gains at the same rate as ordinary income.
Federal Capital Gains Tax Rates
At the federal level, capital gains tax rates differ based on the type of gain and the taxpayer’s income level. Short-term capital gains—profits from assets held for one year or less—are taxed as ordinary income. Long-term capital gains—profits from assets held for more than one year—are taxed at reduced rates.
For the 2025 tax year, the federal long-term capital gains tax rates are as follows:
| Filing Status | Income Range | Tax Rate |
|---|---|---|
| Single | $0 – $44,625 | 0% |
| $44,626 – $492,300 | 15% | |
| Over $492,300 | 20% | |
| Married Filing Jointly | $0 – $89,250 | 0% |
| $89,251 – $553,850 | 15% | |
| Over $553,850 | 20% | |
| Married Filing Separately | $0 – $44,625 | 0% |
| $44,626 – $276,900 | 15% | |
| Over $276,900 | 20% | |
| Head of Household | $0 – $59,750 | 0% |
| $59,751 – $523,050 | 15% | |
| Over $523,050 | 20% |
Additionally, a 3.8% Net Investment Income Tax (NIIT) applies to individuals with modified adjusted gross income (MAGI) above certain thresholds: $200,000 for single filers and $250,000 for married couples filing jointly.
How Illinois Residents Are Taxed on Capital Gains
Illinois residents are subject to both federal and state taxes on capital gains. Here’s how it works:
- Federal Taxation:
- Short-Term Capital Gains: Taxed as ordinary income, with rates ranging from 10% to 37%, depending on the taxpayer’s federal income tax bracket.
- Long-Term Capital Gains: Taxed at preferential rates of 0%, 15%, or 20%, based on taxable income and filing status.
- State Taxation:
- Both short-term and long-term capital gains are taxed at Illinois’ flat income tax rate of 4.95%.
Capital Gains Tax Planning Strategies
Effective tax planning can help Illinois residents minimize their capital gains tax liabilities. You should considering working with a professional advisor. Here are some strategies to consider:
- Hold Investments Longer Than One Year: By holding assets for more than a year, taxpayers can benefit from lower long-term capital gains tax rates at the federal level.
- Harvest Losses: Selling investments at a loss can offset gains from other investments, thereby reducing overall taxable income. If losses exceed gains, up to $3,000 can be deducted against ordinary income annually, with excess losses carried forward to future years.
- Invest in Opportunity Zones: Reinvesting capital gains into Qualified Opportunity Funds that invest in designated Opportunity Zones can defer and potentially reduce capital gains taxes. If the investment is held for at least ten years, any additional gains may be tax-free.
- Utilize 1031 Exchanges: For real estate investors, a 1031 exchange allows deferral of capital gains taxes when the proceeds from the sale of a property are reinvested into a similar property. This strategy requires adherence to specific timelines and regulations.
- Consider Renewable Energy Tax Credits: Investing in renewable energy projects can provide tax credits that offset tax liabilities. These credits can be particularly beneficial for high-net-worth individuals and business owners seeking to reduce their taxable income.
Example Scenarios
Scenario 1: Utilizing a 1031 Exchange
Jane, an Illinois resident, owns a rental property purchased for $300,000, now valued at $500,000. She wants to sell the property but avoid immediate capital gains taxation on the $200,000 appreciation. By engaging in a 1031 exchange, Jane sells her current property and reinvests the proceeds into a new rental property of equal or greater value. This allows her to defer paying capital gains taxes, thereby preserving her investment capital.
Scenario 2: Participating in a Renewable Energy Tax Equity Deal
John, a high-net-worth individual, invests $200,000 in a solar energy project that qualifies for federal renewable energy tax credits. In return for his investment, John receives tax credits that directly reduce his federal tax liability. Additionally, any income generated from the project provides further returns on his investment. This strategy not only supports sustainable energy initiatives but also offers substantial tax benefits.
Conclusion
Understanding and effectively managing capital gains taxes are essential components of financial planning for Illinois residents. By staying informed about both federal and state