Illinois 2026 Tax Changes — What the One Big Beautiful Bill Act (OBBBA ) Means for Residents
On January 1, 2026, the federal tax code underwent a historic and positive transformation. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, made permanent the major tax cuts from the 2017 Tax Cuts and Jobs Act (TCJA) and introduced new, taxpayer-friendly benefits. The long-feared 2026 “tax cliff” has been avoided.
For Illinois residents, who navigate both a flat state income tax and high property taxes, these permanent federal changes provide significant and welcome relief. This guide breaks down exactly how the new OBBBA tax law impacts every Illinois taxpayer—from W-2 earners in Chicago and professionals in Naperville to business owners in Peoria and retirees across the state.
Federal Changes Bring Relief to Illinois Taxpayers
While Illinois has its own state tax system, your federal tax bill is a major part of your overall financial picture. OBBBA has made that picture much brighter.
Lower Federal Tax Brackets are PERMANENT
The biggest news is that the lower individual income tax rates from the TCJA are now permanent. The anticipated jump in federal tax rates has been avoided
Illinois Impact:
This is a crucial win for Illinois’s working families. In a state with a significant tax burden, having lower, predictable federal tax rates provides much-needed breathing room. Dual-income households in the Chicago suburbs, union and trades workers, and professionals in the healthcare and education sectors will all benefit from keeping more of their hard-earned money.
The federal standard deduction decreases significantly:
The Federal Standard Deduction is PERMANENT
The higher federal standard deduction, which simplifies tax filing for millions, is also here to stay.
Illinois Impact:
A permanent, higher federal standard deduction is a direct benefit for the majority of Illinois residents. It provides a substantial, straightforward deduction on your federal return, lowering your taxable income without the need for complex itemization.
The QBI Deduction is PERMANENT and ENHANCED (Federal Level)
The 20% Qualified Business Income (QBI) Deduction is not expiring. OBBBA made it a permanent part of the federal tax code and even improved it.
Important Note for Illinois:
Illinois is a non-conforming state, meaning it does not offer a state-level QBI deduction. However, this powerful 20% deduction remains fully available on your federal tax return.
This is a major federal benefit for Illinois’s:
- LLCs, S-Corps, and Sole Proprietors
- • Real estate investors and landlords
- Independent contractors and gig economy workers
- Construction and trade businesses
Key OBBBA Enhancements to QBI:
- Permanence: The 20% federal deduction is locked in for 2026 and
- Minimum Deduction: A new $400 minimum federal deduction is available for any business with at least $1,000 of qualified income.
Illinois Impact:
For the thousands of small businesses that drive the Illinois economy, the permanent federal QBI deduction provides certainty and significant federal tax savings. Strategic planning to maximize this federal benefit is more important than ever.
New Federal Tax Breaks for Illinois Residents
OBBBA also introduced several new federal deductions that are highly relevant to Illinois’s workforce and population:
- Senior Deduction: An additional $6,000 deduction for individuals 65 and older, providing federal tax relief for Illinois’s retirees (subject to phase-out).
- OvertimeDeduction: Deduct up to $12,500 ($25,000 for joint filers) of qualifiedovertime pay, a significant benefit for Illinois’s large industrial and trade workforce.
- Auto Loan Interest Deduction: Deduct up to $10,000 in interest on new personal vehicle loans from 2025-2028.
Illinois-Specific Tax Considerations for 2026
Illinois State Income Tax & Federal AGI
Illinois has a flat 4.95% state income tax. Because Illinois uses federal Adjusted Gross Income (AGI) as the starting point for state taxes, the permanent federal deductions under OBBBA help keep your AGI lower, which in turn can reduce your state tax liability. While the state tax rate remains the same, a lower starting income figure is a clear benefit.
Retirement Income is Tax-Free in Illinois
Illinois is one of the few states that does not tax most forms of retirement income, including
distributions from 401(k)s, IRAs, and pensions. This state-level benefit is now amplified
by the permanent lower federal tax rates under OBBBA, making Illinois an even more attractive state for retirees from a tax perspective.
Real Estate in a High-Property-Tax State
For owners of Illinois real estate, OBBBA brings good news. The 100% bonus depreciation
for qualified property is now a permanent part of the federal tax code. This allows
investors to immediately write off the cost of certain improvements on their federal return, creating significant tax savings that can help offset Illinois’s high property taxes. For property owners in Chicago, Naperville, and across the state, this permanent provision provides a stable foundation for managing and growing real estate investments.
What Illinois Taxpayers Should Do Now
- UpdateYour Tax Plan: Your old strategy, based on the fear of expiring tax cuts, is It’s time to build a new plan based on permanence and new federal opportunities.
- Integrate Federal and State Planning: Work with a professional who understands how to maximize permanent federal benefits while navigating Illinois’s state tax laws.
- Maximize the Federal QBI Deduction: If you own a business, ensure your structure and bookkeeping are optimized to claim the full 20% federal QBI deduction.
- LeverageReal Estate Benefits: Plan your real estate investments to take full advantage of permanent 100% bonus depreciation on your federal return to help offset high state property taxes.
Illinois 2026 Tax FAQ
Does Illinois conform to QBI?
No — QBI is a federal deduction only.
Will Illinois taxes rise in 2026?
The rate does not change, but taxable income may be higher due to federal changes.
Are families impacted?
Yes — reduced credits and higher federal taxable income affect many households.
Are STR owners affected?
Yes — depreciation and participation rules change.
Are retirees affected?
Federal tax on retirement income may rise, even though Illinois doesn’t tax retirement income.
Get Your Personalized 2026 Illinois Tax Plan
Living in Illinois comes with a unique financial landscape. The new, permanent federal tax laws under OBBBA provide a powerful tailwind for Illinois residents. To make the most of it, you need a strategy that aligns these federal benefits with your specific situation in Illinois. A personalized strategy session will ensure you are structured to capture every new and permanent advantage.
Because tax situations vary by individual and business, many Illinois residents choose to work with a qualified tax professional. You can explore available Illinois tax services here: