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Introduction to Airbnb Taxation in Chicago

When it comes to earning income through Airbnb in Chicago, there’s more to consider than just the host-guest interaction. One of the crucial aspects that often gets overlooked is taxation.  This comprehensive guide aims to enlighten you about the maze that is taxation for Airbnb income in Chicago – a Windy City.

Understanding the Basics of Airbnb Income Taxation

What is Airbnb Income?

Airbnb income refers to the money you earn by renting out your property through the Airbnb platform. It’s considered a form of rental income and is subject to various tax laws, just like any other income source.

How is Airbnb Income Taxed?

In the U.S., the Internal Revenue Service (IRS) considers Airbnb income as taxable income. This means hosts are required to report this income on their federal tax return.

Key Tax Regulations for Airbnb Hosts in Chicago

The Evolving Landscape: Regulation of Airbnb in the City of Chicago

Federal Tax Obligations

When it comes to the federal tax system, your tax rate will depend on your total income for the year. This includes your Airbnb earnings and any other income you may have. The U.S. uses a progressive tax system, where the tax rate increases as the taxable income increases. There are seven tax brackets ranging from 10% to 37%.

It’s also worth noting that if you rent out your property for more than 14 days in a year, the IRS requires you to report this income. However, if you rent it out for 14 days or less in a year, under the “Master’s Exemption,” you may not have to report this income. This rule might have changed, and it’s advisable to consult with a tax advisor or do some research to get the most updated information.

Another important point to remember is that tax laws and rates can change from year to year due to new legislation or adjustments for inflation. Therefore, it’s critical to stay updated on any changes that might affect your tax obligation as an Airbnb host.

State and City Tax Obligations

In addition to the federal income tax, Airbnb hosts in Chicago have to contend with both state and city taxes.

First, let’s talk about state taxes. As a resident of Illinois, or a non-resident earning income in the state, you are required to pay state income tax. The state of Illinois has a flat tax system, which means that everyone, regardless of income, pays the same tax rate on their taxable income. This is unlike the federal system which uses a progressive tax system. As of my knowledge cutoff in September 2021, the flat rate in Illinois was 4.95%.

Next, let’s look at city taxes. Specifically, for Airbnb hosts in Chicago, there’s the Chicago Hotel Accommodations Tax Vacation Rental and Shared Housing Surcharge to consider. 

Effective December 1, 2018, Chicago implemented a base tax rate of 4.5% on the gross rental or leasing charge for accommodations. This would be applicable to properties rented out through platforms like Airbnb.

In addition to this base rate, for vacation rentals and shared housing units (which includes Airbnb rentals), there’s an additional surcharge of 6%. So, when you add this surcharge to the base rate, the total city tax rate amounts to 10.5% of the gross rental or leasing charge.

To put it in simpler terms, if you’re an Airbnb host in Chicago, you are required to levy a tax of 10.5% on the total rental income you receive from your guests. This amount represents the combined base tax rate and the additional surcharge.

It’s important to note that these tax amounts are usually passed on to the guests and are often included in the total payment the guests make at the time of their booking. On Airbnb, this tax is automatically collected from the guests and remitted to the city by Airbnb, simplifying the process for hosts.

Deductibles: Reducing Your Airbnb Tax Burden

Common Deductibles for Airbnb Hosts

There are various expenses hosts can deduct from their Airbnb income. These include costs for cleaning services, home insurance, property taxes, mortgage interest, and even utilities.

Unique Deductibles for Airbnb Hosts in Chicago

Hosts in Chicago can also claim specific deductions, like the cost of maintaining the residential aspects of the property and expenses incurred due to local ordinances or regulations.

The Process of Filing Your Airbnb Taxes

Collecting and Organizing Necessary Documents

To successfully file your taxes, you need to organize all relevant documents. These include a record of your Airbnb earnings and documentation of any deductions you want to claim.

Filing the Tax Forms

Online Tax Filing. Online tax filing, also known as e-filing, is a process that allows you to submit your tax returns over the Internet. This method has become popular due to its convenience, speed, and step-by-step guidance provided by the software, which can help minimize errors. Different platforms can walk you through the process of filing your tax returns, providing explanations and assistance along the way. These platforms can help you understand what income needs to be reported, what deductions you might qualify for, and how to navigate complex tax situations.

In-person Tax Filing. Alternatively, you can seek the assistance of a tax professional. They can provide personalized advice based on your situation, which can be especially helpful if you have complex tax circumstances.

Consequences of Ignoring Airbnb Tax Obligations

It’s essential to understand that ignoring your Airbnb tax obligations can lead to serious consequences. Penalties can range from fines and interest on unpaid taxes to more severe punishments like criminal charges for tax evasion. Therefore, always take your tax obligations seriously.

Useful links: 

Chicago, IL – Airbnb Help Center

Airbnb Legal Issues and Statistics by City

Conclusion

Navigating the tax maze as an Airbnb host in Chicago can seem daunting. However, with the right understanding of federal, state, and city tax regulations, along with knowledge about deductibles and the filing process, it becomes a manageable task. The key lies in staying organized, being proactive, and seeking professional help if needed.

Explore Understanding the Taxation of Airbnb Earnings in Phoenix, Arizona.

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