Illinois Retirement Income Tax: What Seniors Pay

Illinois taxes none of your qualified retirement income, so the Illinois retirement income tax bill on Social Security, a pension, an IRA, or a 401(k) is zero.1 Military retired pay, railroad retirement, a government disability plan, and a state or local government deferred compensation plan are subtracted too, with no age requirement and no dollar cap.1 Non-retirement income, such as wages, is taxed at a flat 4.95 percent.1 Federal income tax is a separate matter, and both belong in a care budget.

In This Guide

• What Retirement Income Illinois Does Not Tax: the Full List
• How Illinois Taxes Social Security and Pensions
• Does Illinois Tax IRA and 401(k) Withdrawals?
• When Illinois Retirement Income Tax Is Not Zero
• Illinois Retirement Income Tax at a Glance
• Why This Matters for Care
• Frequently Asked Questions
• Next Steps

What Retirement Income Illinois Does Not Tax: the Full List

Most state tax guides need a chart to explain who pays what. The Illinois retirement story fits in a sentence: qualified retirement income is not taxed.

Illinois subtracts qualified retirement income from your taxable income entirely, on Form IL-1040.1 The Department of Revenue's own answer to "does Illinois tax my pension, social security, or retirement income" lists ten things it does not tax:1

• qualified employee benefit plans, including 401(k) plans
• an Individual Retirement Account (IRA) or a self-employed retirement plan
• a traditional IRA that has been converted to a Roth IRA
• the redemption of U.S. retirement bonds
• state and local government deferred compensation plans
• a government retirement or government disability plan, including military plans
• railroad retirement income
• retirement payments to retired partners
• a lump sum distribution of appreciated employer securities
• the federally taxed portion of Social Security benefits

Those amounts are subtracted from income on Form IL-1040 and exempt from Illinois state income tax.1 There is no age requirement and no dollar cap.1

How you claim it. The subtraction is taken on your Illinois return, Form IL-1040, and what you subtract is the federally taxed portion of the income on this list.1 For the line to use on this year's return, follow the Form IL-1040 instructions or ask the Illinois Department of Revenue.

Illinois exempts qualified retirement income outright, so a retiree here does not have to track partial exclusions, age thresholds, or per-person caps. Our state-by-state guide to retirement income tax shows where each state lands.

How Illinois Taxes Social Security and Pensions

For most retirees, these are the two largest income sources, and Illinois exempts both completely.

Social Security is exempt. Illinois does not tax Social Security benefits. They are subtracted from your income, so the state takes nothing from your monthly check.1 The federal government can still tax part of your benefit, never more than 85 percent of it, depending on your modified adjusted gross income plus one-half of your benefits and on your filing status.2 Illinois does not tax it either way.

Public and private pensions are exempt. Both public pensions, including those for teachers, police, and other government retirees, and private pensions from a former employer are exempt from Illinois income tax, with no dollar cap.1 A retiree on a $60,000 private pension pays no Illinois tax on it.

So are three sources retirees often assume are taxed. A government retirement or government disability plan, including military plans, is on the Department's list, so military retired pay is subtracted. So is railroad retirement income. So is a state or local government deferred compensation plan, the kind a retired municipal employee draws on.1

If your plan type is not named on that list, do not assume it is taxable.1 Confirm it with the Illinois Department of Revenue or a tax preparer.

A retired service member who also has a VA disability rating can see what the state offers at each rating level in our guide to Illinois disabled veteran benefits by VA rating.

Does Illinois Tax IRA and 401(k) Withdrawals?

Your tax-deferred savings get the same hands-off treatment.

When you withdraw from a traditional IRA or a 401(k), Illinois does not tax the distribution. These withdrawals count as qualified retirement income and are subtracted from your Illinois taxable income.1

This matters most in the required minimum distribution (RMD) years, when the withdrawal is mandatory and can be large. Illinois subtracts it whatever its size, so a big RMD does not create a state bill.1 Federal income tax can still apply to the withdrawal, and the state does not add to it.

A traditional IRA that has been converted to a Roth IRA is on the Department's list as well, so the conversion does not create an Illinois tax bill.1 Our guide to retirement accounts for care covers how to draw these accounts down when care costs enter the picture.

When Illinois Retirement Income Tax Is Not Zero

The exemption is broad, but it is not unlimited. Some income still gets taxed.

Illinois levies a flat 4.95 percent income tax on non-retirement income.1 The word that matters is "qualified." The exemption covers the income on the Department's list, not every dollar that happens to land in a retiree's account.

Work income. Wages from a part-time job and self-employment income are not retirement income, so the flat rate applies to them even while your pension and Social Security are subtracted.1

Savings and property income. The Department's list does not name bank interest, dividends, capital gains from a taxable brokerage account, or rental income. The retirement subtraction does not reach them, and 4.95 percent is the Illinois rate on non-retirement income.1 Other Illinois rules can change the result for a particular source, so confirm yours with the Department or a tax preparer before you budget around it.

A plan the list does not name. A non-qualified annuity is one example. Do not assume it is taxable.1 Confirm how Illinois treats it with the Department of Revenue or a tax preparer. The list is broader than the four sources people usually name, and it includes government deferred compensation, military and railroad retirement, retirement payments to retired partners, and a lump sum distribution of appreciated employer securities.1

What this means in practice:

• A retiree on Social Security and a pension owes no Illinois income tax on that income.1
• A retiree drawing large IRA and 401(k) distributions still owes no Illinois income tax on those withdrawals, regardless of the amount.1
• A retiree with wages from a part-time job pays the flat 4.95 percent on those wages only.1
• A retiree who also lives on interest, dividends, or rent should expect the flat rate to be in play on that income and should confirm the treatment before counting it as spendable.

Property taxes are a separate bill. Our guide to Illinois senior property tax relief covers that side.

Illinois Retirement Income Tax at a Glance

Why This Matters for Care

State tax is not an abstraction when you are pricing assisted living or in-home help. It is money that stays in or leaves your budget before the care bill arrives.

Illinois leaves qualified retirement income alone. The state takes none of a $5,000 monthly pension.1 Federal income tax can still come out of it, so budget on what is left after that. Even so, that is more income available to cover housing, health, and care than the same retiree would keep in a state that taxes pensions and 401(k) withdrawals.

That is why the tax picture belongs in any honest funding plan. Our guide to building a senior care funding plan walks through how to map income, taxes, and care costs together, and the broader guide to paying for senior care covers Medicaid, VA benefits, and private-pay options once you know what your spendable income actually is.

Next Steps

The income-tax side is simple, so use the time it saves to plan the rest.

• Confirm your income is qualified retirement income. Social Security, pensions, IRA, and 401(k) withdrawals are exempt; wages and similar income are not.1
• Budget with what is left after federal tax. Illinois takes nothing from qualified retirement income,1 but federal income tax can still come out of it. Plan your care budget on the after-federal-tax amount, not the gross.
• Account for the flat rate on side income. If you keep working part-time, set aside 4.95 percent on those wages.
• Build the spendable number into your care budget. With no state income tax on qualified retirement income, more of it can go toward care.
• Check the Department's list before assuming something is taxable. It is longer than the usual four sources, and it covers military and railroad retirement, government disability plans, and state and local government deferred compensation.1 For a plan type it does not name, such as a non-qualified annuity, confirm the treatment with the Illinois Department of Revenue or a tax preparer.

If retirement income alone will not cover care, figuring out what else can is the next hard step, and it is a real one. Weigh home equity, long-term care insurance, and benefits programs against your income before you commit to a care arrangement.

Learn More

Find personalized help mapping your Illinois retirement income against care costs at brevy.com.

The information on Brevy.com is for educational purposes only and is not a substitute for professional legal, financial, or medical advice. Rules vary by state and program and change frequently. Always verify with the relevant agency or a qualified professional. Brevy is not a law firm, financial advisor, or healthcare provider.