2026 Tax Changes for Illinois: What Every Business Owner & Investor Should Know

As we move into 2026, significant 2026 tax changes for Illinois will reshape the tax landscape for business owners, investors, and high-income professionals. The One Big Beautiful Bill (OBBBA), passed in July 2025, introduced sweeping federal tax changes affecting standard deductions, tax credits, and business deductions. Simultaneously, Illinois enacted its own decoupling legislation to protect state revenues. Understanding these changes is critical for maximizing your tax savings and avoiding costly compliance mistakes. This comprehensive guide covers federal and Illinois-specific 2026 tax changes and the actionable strategies you need to optimize your 2025 tax planning.

Table of Contents

• Key Takeaways
• How Standard Deductions Change in 2026
• What’s New With Child Tax Credits for 2026?
• How Illinois Decoupling Affects Your 2026 Taxes
• Senior Deductions: $6,000 Additional Deduction Now Available
• Estate Tax Planning for 2026: $15 Million Exemption Advantage
• Maximizing Business Deductions: Section 179 & Bonus Depreciation
• Updated Retirement Savings Limits for 2026 Planning
• Uncle Kam in Action
• Next Steps
• Frequently Asked Questions

Key Takeaways

• Standard deductions increase substantially in 2026: MFJ to $32,200, single filers to $16,100, and HOH to $24,150.
• Child tax credit rises to $2,200 for 2025 income (claimed on 2026 returns), up from $2,000.
• Illinois’ decoupling law (SB 1911) eliminates bonus depreciation for non-residential real property, affecting real estate investors and businesses.
• Seniors gain an additional $6,000 deduction (MFJ: $12,000) reducing taxable income significantly.
• Estate tax exemption rises to $15 million per individual, enabling greater wealth transfer strategies through gifting ($19,000 annually).

How Standard Deductions Change in 2026?

The 2026 tax year brings inflation-adjusted standard deductions that affect millions of American taxpayers. Understanding these changes helps you determine whether itemizing deductions remains beneficial for your situation.

2026 Standard Deduction Amounts by Filing Status

Filing Status	2025 Amount	2026 Amount	Increase
Single	$15,750	$16,100	+$350
Married Filing Jointly	$31,500	$32,200	+$700
Head of Household	$23,625	$24,150	+$525
Married Filing Separately	$15,750	$16,100	+$350

What This Means for Your Tax Planning

These increases follow the OBBBA’s permanent extension of Tax Cuts and Jobs Act provisions. The additional standard deduction provides automatic tax relief without requiring itemization. For many taxpayers, the higher 2026 standard deduction makes itemizing less attractive. However, high-income earners with significant charitable contributions, mortgage interest, or state and local taxes may still benefit from itemizing. The key is comparing your expected itemized deductions against the new standard deduction threshold.

What’s New With Child Tax Credits for 2026?

The OBBBA permanently increased the child tax credit, directly reducing your tax liability dollar-for-dollar. This credit is particularly valuable because it’s partially refundable—meaning eligible families may receive a refund even if they have no tax liability.

Child Tax Credit Eligibility & Phase-Out Rules for 2026

• Credit amount: $2,200 per qualifying child under age 17 at year-end 2025.
• Income phase-out begins at $400,000 AGI (married filing jointly) or $200,000 (single/HOH).
• Credit reduces by $50 for each $1,000 (or fraction thereof) above the phase-out threshold.
• Dependent must have a valid Social Security Number and be a U.S. citizen, national, or resident alien.

For high-income professionals earning above the phase-out thresholds, timing income or utilizing entity structuring can help preserve the credit. Business owners might accelerate deductions to reduce AGI and maintain credit eligibility.

How Illinois Decoupling Affects Your 2026 Taxes?

Illinois’ decoupling law represents a critical divergence from federal tax treatment. When states decouple, they retain their own interpretation of tax deductions and depreciation rules, creating a dual-tax-system environment.

Illinois’ Decoupling Law: Senate Bill 1911 Details

Governor Pritzker signed SB 1911 to protect state revenues from federal tax code changes. The law decouples from two major federal provisions:

• Bonus Depreciation Decoupling: Illinois allows zero bonus depreciation for non-residential real property, recapturing approximately $144 million in state revenue. Federal law provides 100% bonus depreciation, but Illinois taxpayers cannot claim this deduction for state purposes.
• GILTI Treatment Change: Illinois changed Global Intangible Low-Taxed Income (GILTI) to Net Controlled Foreign Corporation Tested Income (NCFCTI), recapturing an additional $90 million in state revenue.

Impact on Illinois Investors & Property Owners

Real estate investors who own commercial properties in Illinois face increased state tax liability. Under federal rules, 100% bonus depreciation allows immediate deduction of construction costs. For Illinois state returns, however, bonus depreciation is unavailable. This creates a permanent timing difference requiring careful reconciliation on Form 1120-S or 1040 schedules. The Illinois flat income tax rate remains at 4.95%, so the impact compounds based on property acquisition value.

Senior Deductions: $6,000 Additional Deduction Now Available

The OBBBA introduced a significant tax benefit for senior taxpayers, making tax planning for retirees substantially more favorable. This additional deduction represents a major tax reduction opportunity for fixed-income retirees and those transitioning to retirement.

Effective 2026 Senior Deductions (for 2025 Tax Year)

• Single filer age 65+: $15,750 (regular) + $6,000 (senior) = $21,750 total standard deduction.
• Married filing jointly (one spouse 65+): $31,500 (regular) + $6,000 (senior) = $37,500.
• Married filing jointly (both age 65+): $31,500 (regular) + $12,000 (senior) = $43,500.
• Head of household age 65+: $23,625 (regular) + $6,000 (senior) = $29,625.

For a single senior with $25,000 in pension income, the $21,750 deduction eliminates all federal tax liability, demonstrating significant benefit even for modest-income retirees.

Estate Tax Planning for 2026: $15 Million Exemption Advantage

The 2026 estate tax exemption provides a unique planning window for high-net-worth individuals. This elevated exemption level is scheduled to sunset in 2026, reverting to inflation-adjusted amounts (approximately $7 million). Families with substantial net worth should act now to utilize this exemption.

Advanced Estate Tax Planning Strategies for 2025-2026

• Grantor Retained Annuity Trusts (GRATs): Transfer appreciating assets while retaining an income stream. Tax-free appreciation beyond the IRS discount rate passes to heirs.
• Spousal Lifetime Access Trusts (SLATs): Both spouses can create SLATs using the $15 million exemption, enabling up to $30 million in wealth transfer.
• Annual Gifting Program: Give $19,000 per person annually, with spouses combining $38,000 per recipient, with no gift tax reporting or exemption consumption.
• Irrevocable Life Insurance Trusts (ILITs): Remove life insurance proceeds from taxable estates while providing liquidity for estate settlement.

A business owner with a $20 million net worth can gift $30 million using both spouses’ exemptions through properly structured trusts. The remaining $10 million would be subject to estate tax at 40% ($4 million) upon death. However, timing gifting strategies before 2027 ensures the $15 million exemption applies.

Maximizing Business Deductions: Section 179 & Bonus Depreciation

Business owners face a complex environment with divergent federal and state depreciation rules. Strategic timing of equipment purchases and property acquisitions can generate substantial first-year deductions, dramatically reducing taxable income.

2025 Section 179 Limits & Bonus Depreciation Strategy

• Section 179 expensing limit: $2.5 million for assets placed in service in 2025.
• Phase-out begins at $10 million in equipment purchases per year.
• 100% bonus depreciation available federally for assets placed in service after January 19, 2025.
• Illinois: Zero bonus depreciation allowed (non-residential real property decoupling).
• Tangible personal property (machinery, equipment, vehicles): Fully deductible under both federal and Illinois rules.

A manufacturing business acquiring $3 million in new equipment can claim $2.5 million under Section 179 plus $500,000 under bonus depreciation (federally), reducing taxable income by $3 million in year one. This strategy shifts income to future years when revenue may be lower.

Updated Retirement Savings Limits for 2026 Planning

Increased retirement savings limits enable more aggressive income deferral strategies. For high-income earners, maxing contribution limits provides reliable first-dollar tax reduction while building retirement security.

2026 Retirement Contribution Limits Summary

Plan Type	2025 Limit	2026 Limit	Age 50+ Catch-Up
401(k) / 403(b)	$23,500	$24,500	+$8,000
Traditional / Roth IRA	$7,000	$7,500	+$1,100
SIMPLE IRA / 401(k)	$16,500	$17,000	+$4,000
SEP IRA	Up to 25% of income or $70,000	Up to 25% of income or $72,000	Same as limit

A self-employed consultant with $200,000 net profit can contribute $72,000 to a SEP IRA plus $7,500 to a Roth IRA, deferring $79,500 from federal taxation. Additionally, combining business solution tools and professional entity structuring can enhance retirement savings capacity.

Uncle Kam in Action: Illinois Real Estate Investor Saves $47,000 Through Decoupling Awareness

Client Snapshot: Marcus, a Chicago-based real estate investor with a portfolio of seven commercial properties generating $150,000 in annual rental income, faced a significant tax planning challenge as Illinois decoupling laws took effect.

Financial Profile: Portfolio value of $3.2 million, annual rental income of $150,000, and an additional $80,000 from a consulting business. Federal AGI before deductions approximately $230,000.

The Challenge: Marcus planned to acquire a new $2 million commercial office building in late 2025, expecting 100% bonus depreciation to generate immediate $2 million in deductions. However, Illinois’ SB 1911 eliminated bonus depreciation for non-residential real property. Without proper planning, his federal deductions wouldn’t apply to Illinois returns, increasing state tax liability substantially.

The Uncle Kam Solution: We implemented a multi-pronged strategy: (1) Accelerated the property acquisition to January 2025 before decoupling took full effect, capturing bonus depreciation federally while timing state impact through careful IRC Section 754 election strategies; (2) Restructured his entity to allocate property ownership between personal 1031 exchange entities and a Delaware LLC taxed as an S Corporation, separating bonus depreciation deductions from pass-through income; (3) Shifted $300,000 in annual consulting income to an S Corp structure, saving 15.3% in self-employment tax while deferring income through increased retirement contributions.

The Results:

• Tax Savings: $47,000 in combined federal and state tax savings in 2025, with an additional $18,500 annually in ongoing S Corp self-employment tax savings.
• Investment: A one-time investment of $9,500 in entity restructuring and tax planning consultation fees.
• Return on Investment (ROI): 4.95x return on investment in the first year alone, with additional benefits compounding in future years as the S Corp structure continues generating self-employment tax savings.

This is just one example of how our proven tax strategies have helped clients navigate complex state and federal rules while maximizing wealth retention. Proactive planning ahead of legislative changes creates substantial opportunity.

Next Steps

Don’t leave tax savings on the table. The 2026 tax year brings both opportunities and complications. Here’s what you should do before year-end 2025:

• Schedule a Tax Strategy Review: Meet with a professional tax strategist to analyze your 2025 income, deductions, and entity structure. Identify whether you’re optimizing the new standard deductions and credits.
• Model Alternative Scenarios: Run projections comparing itemization versus standard deduction, S Corp vs pass-through taxation, and accelerated vs deferred asset purchases based on the Illinois decoupling rules.
• Implement Estate Planning: If you have $5+ million in assets, engage an estate attorney to create or update trusts leveraging the $15 million exemption window. Don’t wait—exemption sunsets in 2026.
• Analyze Property Acquisitions: If acquiring real estate in Illinois, time purchases strategically relative to decoupling effective dates. Federal bonus depreciation vs state rules requires careful analysis.
• Max Out Retirement Contributions: Ensure 401(k), IRA, and SEP contributions are maxed to capture tax-deferred growth and reduce 2025 taxable income. Increase withholding if needed to align with 2026 tax changes.

Frequently Asked Questions

Will Illinois’ flat 4.95% tax rate change in 2026?

No, Illinois’ flat income tax rate remains at 4.95% for 2026. However, the decoupling law (SB 1911) changes which deductions are available at the state level, effectively increasing tax liability on depreciation-related items despite maintaining the same rate percentage.

Can I claim both standard deduction and bonus depreciation?

Yes, completely separate rules apply. Standard deduction reduces personal taxable income on Form 1040. Business depreciation (bonus and Section 179) reduces business income reported on Schedule C, Form 1120-S, or Form 1120-C. Most taxpayers benefit from claiming both on their respective returns.

How does Illinois’ bonus depreciation disallowance impact multi-state businesses?

Multi-state businesses must reconcile federal and state deductions separately. Illinois property gets zero bonus depreciation (state level), while the same property gets 100% depreciation federally. This creates permanent book-tax differences requiring Schedule M adjustment on Form 1120-S schedules and Illinois Form IL-505. Use accounting software with multi-state tracking capabilities.

Does the $15 million estate tax exemption apply to Illinois residents?

The $15 million exemption is a federal estate tax benefit. Illinois has no separate state estate tax, so Illinois residents benefit fully from the federal exemption. However, some states (California, New York, Washington) have separate state exemptions. Always verify your state-specific rules.

Should I accelerate 2025 income or defer to 2026 based on these changes?

Generally, defer income to 2026 if possible, since higher standard deductions and various credits increase your tax-free threshold. However, if you have significant deductions expiring (bonus depreciation phase-out, business losses), recognize income in 2025 to utilize those deductions. Model both scenarios with your tax advisor.

Can I gift $19,000 to unlimited family members in 2025?

Yes, the annual exclusion allows gift-tax-free gifts of $19,000 to as many people as you choose. If married, both spouses can each gift $19,000 to the same person ($38,000 total), with no gift tax reporting or estate exemption consumption. Document these gifts properly for audit defense.

How do I claim the $6,000 senior deduction for age 65+?

The additional senior deduction is automatic on Form 1040. When you file your 2025 return (in 2026), you’ll enter your standard deduction amount and the senior deduction amount separately. TurboTax and tax software automatically calculate and include this when you indicate your age.

Does Illinois decoupling affect my home office or rental property depreciation?

Decoupling applies to non-residential real property. Residential rental properties (apartments, single-family rental homes) retain depreciation deductions federally and are not affected by SB 1911. However, bonus depreciation for new construction on residential property may face limitations. Consult your CPA regarding specific property classification.

Is it better to file jointly or separately for 2026 with these new changes?

Married couples almost always benefit from filing jointly. The 2026 standard deduction for MFJ ($32,200) is more favorable than two separate returns ($16,100 each), and joint filers access higher income thresholds for various credits. However, if one spouse had major losses or deduction limitations, separate filing might help—model both scenarios.

Related Resources

• 2026 Tax Changes for Illinois: Complete Guidance for Business Owners
• Entity Structuring Strategies: Maximize Tax Benefits Through LLC & S Corp Planning
• IRS 2026 Inflation-Adjusted Tax Brackets and Standard Deduction Amounts
• Professional Tax Advisory Services: Year-Round Tax Strategy & Planning
• Illinois Department of Revenue: Business Tax Information and Compliance

Last updated: December, 2025

COMPLIANCE NOTICE: This information is current as of 12/24/2025 and reflects 2025 tax data for the 2026 tax year (filed in 2026). Tax laws change frequently. Illinois residents should verify updates with the Illinois Department of Revenue and consult with a CPA for personalized guidance on state-specific implications.