Beginning with tax years ending on or after December 31, 2025, the state is making several important updates to how the Returning Citizen Credit works. These changes affect how employers qualify for the incentive, how much they can claim, and—for the first time—require employers to apply for approval before receiving the credit.
What Is the Illinois Returning Citizen Credit?
The Illinois Returning Citizen Credit is a state income tax credit available to employers who hire individuals who were previously incarcerated in an Illinois adult correctional facility. Starting with tax years ending on or after December 31, 2025, employers may claim a credit equal to 15% of qualified wages paid during the employee’s first year of work, up to $7,500 per returning citizen hired.
While the credit has existed in previous tax years, major updates take effect for 2026, including a new application requirement and a cap on the total amount of available credits statewide.
New for 2026: Employers Must Apply Before Receiving the Credit
This is the most important change to understand:
Beginning January 1, 2026, employers must apply online through MyTax Illinois to be approved for the credit before they can claim it on their tax return.
Credits will be awarded on a first-come, first-served basis, and Illinois has limited the total amount of credits statewide to $1 million per year. Because demand may exceed availability, employers with qualifying hires should plan to apply as early as possible.
To avoid delays, Illinois encourages all employers to create or verify their MyTax Illinois account well before the January 1, 2026, application opening.
Who Qualifies as a “Returning Citizen”?
To qualify for the credit, the employee must meet all of the following criteria:
- Has been convicted in Illinois or any other jurisdiction
- Was incarcerated in an Illinois adult correctional facility
- Is not a registered sex offender
- Was hired within 5 years of their release from an Illinois correctional facility
These criteria must be verified by the Illinois Department of Revenue (IDOR). When applying, employers will need to provide information such as the employee’s date of birth, IDOC number, release date, wage details, and hire date.
What Counts as Qualified Wages?
Not all wages are eligible for the credit. Qualified wages must:
- Be subject to FUTA (Federal Unemployment Tax Act)
- Exclude any wages paid using federally funded on-the-job training programs
- Apply only to the first 12 months of employment
- Be reduced by certain Social Security Act program payments
Because wage rules can be tricky, many employers benefit from keeping detailed payroll documentation for the first year of employment.
How to Apply for the Credit (Starting January 1, 2026)
Employers will apply through their MyTax Illinois accounts by selecting “Apply for a Returning Citizen Credit.” You may include multiple employees in one application, but each employee will be reviewed individually.
IDOR will verify the information against state records and will notify you through your MyTax Illinois correspondence if the credit is approved. If additional information is needed, the state will contact you, and employers must respond within 10 business days.
If approved, IDOR will issue a credit certificate, which you then use when filing your state return.
How Employers Claim the Credit
After receiving the credit certificate, employers must claim the credit on their Illinois income tax return for the year in which the wages were paid. The credit is reported on:
- Schedule 1299-A (for S Corps and partnerships)
- Schedule 1299-C (for individuals)
- Schedule 1299-D (for corporations, trusts, and estates)
Unused credits can be carried forward for up to five tax years, but they cannot be carried back.
Can Employers Claim the Credit for Prior Years?
For tax years before 2025, no application is required because the statewide cap had not yet been implemented. For 2025 and later, employers must apply and receive approval before claiming the credit, even when amending a prior year’s return.
How Employers Can Prepare Now
Although applications won’t open until January 1, 2026, employers can take steps today to get ahead:
- Ensure your MyTax Illinois account is active and accessible.
- Review your hiring records to identify potential qualifying employees.
- Begin gathering required information, such as IDOC numbers and release documents.
- Establish a process to track qualifying wages for the first year of employment.
If your business regularly hires individuals re-entering the workforce, preparing early increases your chance of receiving the credit before the statewide cap is reached.
If you’re unsure whether your employees qualify or want help preparing payroll reports and wage documentation, the ASAP Payroll team is here to help.
