The start of 2025 ushered in several significant tax law changes in Iowa and Illinois. Here are some of the highlights that you should keep in mind.
In Iowa, the individual income tax rate dropped again.
Thanks to action taken by state lawmakers during last year’s legislative session, Iowa implemented its flat tax rate of 3.8% for all individual taxpayers as of Jan. 1.
This change simplifies the tax structure by replacing the previous graduated tax rates, but it warrants action by both companies and their workforce. Employers are required to adjust withholding amounts accordingly, and employees should update their Iowa W-4 forms to ensure accurate withholding, lest there be some surprises come year-end.
In Illinois, there are several notable changes to tax law.
For one, the state is broadening its sales tax base to include retail leases of personal property with certain exceptions (motor vehicles, watercraft, aircraft and semi-trailers).
Additionally, sales tax assessed on acquisitions by retailers who lease tangible personal property (TPP) now will be paid over the lease term by the final lessee of the TPP. This moves Illinois’ state sales tax into conformity with the majority of other states’ tax structures. This change also ensures that sales tax is paid by the final consumer of the eligible products, moving Illinois’ sales tax closer to that of a well-structured consumption tax.
Another Illinois sales tax change: The state will transition to destination-based sourcing for retailers that are responsible for remitting sales taxes on retail sales of TTP that occur outside of Illinois but that are made by a business with a physical presence in the state.
In another new move, while Illinois allows retailers to retain 1.75% of sales taxes collected, the state now is capping the retailers’ discount on sales due at $1,000 per month.
More tax changes might be on the horizon in Illinois. This year, the General Assembly is commissioning a study of the state’s property tax system, with recommendations for improvement due by July 1, 2026. Stay tuned.
State lawmakers in both Iowa and Illinois will continue efforts to update and refine their tax codes. Businesses and consumers should review these updates carefully to ensure compliance and understand their impact.
(Scott Brawdy is a principal and the State and Local Tax (SALT) practice leader for Honkamp, P.C. Based in Honkamp’s Davenport office, he can be reached at [email protected].)
