Iowa and Illinois have significant variance in tax obligations for different types of tax obligations. Illinois is generally perceived as more tax-friendly because it has significantly lower income taxes for higher income earners, but higher rates on other taxes may offset some income tax benefits for some residents.
State income taxes between Iowa and Illinois have significant divergence. Iowa has an escalating structure for state income tax whereby higher income earners pay a higher tax income tax rate. Iowa income earners with more than $62,056 of taxable income in 2008 paid 8.98 percent. Illinois residents pay a flat rate of 3 percent. This gives higher income earners in Illinois a significant tax advantage.
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Iowa's higher tax rate for higher income earners is somewhat offset by the ability to itemize deductions similar to what is done with federal taxes. Property taxes, mortgage interest, and federal taxes paid are among itemized deductions common to federal returns that also apply in Iowa. Joint filers also get some income tax breaks in Iowa. Illinois does not allow itemized deductions, but it does offer a $2,000 deduction for Illinois exemptions and a 5 percent credit for real estate taxes paid.
Sales tax is slightly higher in Illinois. The base rate in Illinois as of May 2011 is 6.25 percent compared with 6 percent in Iowa. Additionally, Illinois has a local tax of 1 percent on food, prescription medications and over-the-counter medications, whereas Iowa residents are exempt from these. Property taxes are generally negligible as variance in rates exists more in communities within each state as opposed to major distinctions between the states.
Retirees choosing between buying property in Illinois versus Iowa typically prefer Illinois when deciding based on taxes. With its flat tax rate and real estate tax credit for property owners, higher income-earning retirees typically pay much less to live in Illinois. Iowa is routinely rated as one of the least-friendly tax states for retirees. Kiplinger magazine included Iowa as one of its "10 least tax-friendly states for retirees" in October 2010.