Paying IL Taxes on a CA judgment?

March 10, 2009 11:56 AM

Taxfilter. What is the correct course of action given my current tax situation?

I spent the entirety of 2008 living and working in Chicago, IL. I did not spend one minute residing or working in another state.

Five years ago, in 2004, I worked for a very shady California company that regularly abused and exploited their workers in violation of CA wage and hour law. In 2007, I opted into a class-action lawsuit against this company.

In fall, 2008, I received a check in the mail for around $1400, which was my share of a settlement on the lawsuit. This check was processed by a CA law firm and already had CA and federal taxes withheld (all properly, as far as I can tell).

Here is my question: Do I need to pay IL income taxes on this money? I can't find and information that speaks to this question without the built-in assumption that actual work was done during the relevant tax year. Obviously, it would be shitty and irrational to have to pay IL taxes on this money, but I recently lived in Oregon (unrelated to this question) where state tax law indeed required just that.

Does anyone have the familiarity with IL taxes to steer my in the right direction here?

Other random tax facts: I am married, filing jointly. My wife was a full-time student for most of 2008, but did have some taxable income. All of our income is from regular-old W-2-producing jobs.

posted by Ignatius J. Reilly to work & money (9 comments total)

Settlements from such lawsuits come in the form of 1099s and W2s; one being counted as wages, and the other being considered liquidated damages. I suggest you do a search on something such as that or get a hold of a tax specialist.

Another option I have found helpful is calling the IRS (crazy I know, but they quite helpful and not as scary as you'd think).

Good luck!
posted by wocka wocka wocka at 12:19 PM on March 10, 2009

1. Mine came in the form of a W-2, with taxes withheld.
2. The IRS will not help me with state taxes. I have no questions or concerns regarding federal taxes.
posted by Ignatius J. Reilly at 12:21 PM on March 10, 2009

Oh, and one more thing, www: IL state income tax is only 3%, so I am sure it would be cheaper for me to "give up" and pay ~$42 that I may not rightly owe than to hire a tax professional. Maybe that isn't correct, but we take the standard deduction and other than this one lawsuit check our taxes are exceedingly simple (just a straight-ahead 1040, no itemization, etc.).
posted by Ignatius J. Reilly at 12:26 PM on March 10, 2009

This didn't happen to be in IL, but when I had a similar MA/MI incident, I had to file in both states. MI gave me money back, which I used to pay IL. It depends on whether or not the states have an agreement that allows you to just apply the taxes you paid in one state to the other.

Have you filed your Illinois taxes? Your tax software should be able to tell you if there's reciprocity between the states.
posted by snickerdoodle at 1:39 PM on March 10, 2009

If I were in this situation, I would call a local CPA and say, "Hey, I have a problem and I wonder if I could talk to someone for 5 minutes or so to determine whether it's worth it for me to procure your services." If they will talk to you, run it by them and see what they say.

You'd think no one would give you advice over the phone without an existing relationship but many times that's not true. My guess is that you do have to pay taxes on it, and maybe someone can point to you the tax code so you'll know that you're not paying unnecessarily.
posted by peep at 2:15 PM on March 10, 2009

Thanks, folks.

snickerd: I have not yet filed my IL taxes, and I don't have tax software. Typically (other than one awful year when I worked in many states), our taxes are so simple and straightforward that I don't need any sort of software.

peep: That sounds like good advice. Even if I had $$$ to throw around on accountants/tax professionals, I really only have this one question which I have to imagine is simply for anyone who knows what they're doing.
posted by Ignatius J. Reilly at 2:32 PM on March 10, 2009

Oh, and we haven't filed our CA taxes yet, but the form is filled out and we're confident we got it right. We're just waiting to get this other shit sorted out.
posted by Ignatius J. Reilly at 2:33 PM on March 10, 2009

"Here is my question: Do I need to pay IL income taxes on this money?"

The very simple answer is yes. The income is taxable in Illinois because Illinois taxes "all-source income," since you are a full-time resident, and it must be reported on your IL return. As a full-year resident of IL, Line 1 of Form IL-1040 asks for your federal AGI from your federal return. Because the CA settlement money is taxable for federal purposes, it is already included in your federal AGI. Illinois does not provide any exemptions for this type of non-wage income.

However, the good news: IL (and most other states) does provide for a credit to be calculated when income has already been taxed in a state in addition to your home state. IL calculates this credit on a state form called IL Schedule CR. Fill out Schedule CR, and it will provide for a credit on your IL return against the tax you've already paid to CA, avoiding double taxation.

(Review the instructions to IL Schedule CR carefully, as it likely requires you to attach a copy of your CA return to the IL return, to prove your claim of the CA tax paid.)

>> Your tax software should be able to tell you if there's reciprocity between the states.

Just FYI for the OP, in Illinois, reciprocity is almost always only applicable to wages earned, rather than non-wage income.

*** THIS TAX INFO BROUGHT TO YOU BY MR. PINEAPPLE. ***
(the real pineapple is shite at this stuff and always defers to her live-in tax professional.)
posted by pineapple at 6:02 PM on March 10, 2009

Kick ass! I loves me some Mr. Pineapple. Thank you very much.
posted by Ignatius J. Reilly at 7:47 PM on March 10, 2009