Illinois 2026 Tax Changes — What Residents & Business Owners Must Know
Starting January 1, 2026, major federal tax changes take effect as earlier provisions expire and updated rules continue nationally.
Illinois residents — who already pay a flat state income tax — will feel these federal changes significantly because higher federal income often leads to a higher Illinois tax bill as well.
- W-2 earners in Chicago, Springfield, Rockford, Naperville, Peoria, and Champaign
- Small business owners, contractors, LLCs, and S-Corps
- Teachers, healthcare workers, and state employees
- Real estate investors, landlords, and STR owners
- Families with children
- Retirees drawing IRA or pension income
- Dual-income households
This page outlines how the 2026 tax changes impact Illinois taxpayers.
Federal Tax Changes Illinois Residents Need to Prepare For
Standard Deduction Shrinks in 2026
How this impacts Illinois
As the federal deduction shrinks:
- More Illinois residents will itemize
- Federal taxable income increases
- Illinois taxable income may increase because state AGI begins with federal AGI
Families and homeowners in Chicago suburbs, college towns, and growing metros feel this most.
The federal standard deduction decreases significantly:
Federal Tax Brackets Increase
- 12% rises to 15%
- 22% rises to 28%
- 24% rises to 31%
- professionals in Chicago, Naperville, and Schaumburg
- dual-income households
- healthcare and education workers
- state and city employees
- union and trades workers
- W-2 households earning between $60K–$250K
QBI (20% Business Deduction) Remains Federal, but Illinois Does Not Conform
Meaning:
- Federal taxable income may decrease
- Illinois taxable income does not receive a matching reduction
- Business owners must plan for both systems
- real estate agents
- consultants
- construction and trades
- small LLCs and S-Corps
- freelancers and gig workers
- online business owners
Child Tax Credit Shrinks
The federal Child Tax Credit decreases:
- From about $2,000 per child
- To about $1,000 per child
- Chicago
- Aurora
- Joliet
- Rockford
- Peoria
- Bloomington
- Champaign-Urbana
Households with multiple children will feel this most.
Marriage Penalty Returns
- Combined income pushes married couples into higher federal brackets faster
- Credits phase out sooner
- Higher taxable income increases both federal and Illinois state taxes
Couples earning between $80K–$200K combined may see noticeable increases.
Illinois-Specific Tax Considerations
1.Illinois Uses Federal AGI as the Basis for State Income Tax
Illinois applies a flat state tax rate, but since state calculations begin with federal AGI:
- lower federal deductions
- higher federal brackets
- reduced federal credits
…cause higher Illinois taxable income.
Even though the rate stays the same, the amount of income subject to Illinois tax often increases.
2. Real Estate Owners and Rental Property Investors Are Strongly Affected
Illinois real estate markets — including Chicago, Naperville, Evanston, Oak Park, and college towns — will see:
- increased capital gains exposure
- reduced depreciation benefits
- more itemized deduction scenarios
- rental activity classification changes
- STR requirement updates
Anyone planning to sell property between 2025–2027 should evaluate timing carefully.
3. Short-Term Rentals Face New Federal Constraints
Illinois STR hotspots include:
- Chicago
- Chicago
- Starved Rock region
- Southern Illinois near Shawnee National Forest
Changes taking effect:
- bonus depreciation reduction
- stricter STR participation documentation
- adjustments in rental loss rules
- new classification rules for STR vs long-term rentals
4.Retirement Income Planning Is More Important in 2026
Illinois does not tax retirement income (pensions, IRA withdrawals, 401(k) distributions).
However, federal changes — including higher brackets — increase the federal tax cost on those withdrawals.
Retirees drawing taxable income may see higher overall liability even though Illinois doesn’t tax retirement income.
Who Is Hit Hardest in Illinois (2026)
- Dual-income households
- Homeowners with mortgages and property taxes
- Business owners and freelancers
- Real estate investors and rental property owners
- STR operators
- Families with children
- Retirees drawing taxable IRA income
- Professionals in Chicago and surrounding suburbs
What Illinois Residents Should Do Before December 31, 2025
- Review federal and state withholding levels
- Maximize retirement contributions before bracket increases
- Evaluate Roth conversions
- Review business entity structure (LLC vs S-Corp)
- Prepare STR and rental documentation
- Plan property sale timing
- Understand how QBI affects federal vs Illinois state taxes
- Build a complete 2025–2026 tax strategy
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 a 2026 Illinois Tax Strategy
Illinois residents face meaningful changes due to reduced deductions, higher federal brackets, altered credit eligibility, and shifting rules around business income and property ownership.
A customized tax plan ensures you are prepared before the 2026 rules take effect.