Yes, Illinois does tax interest income, and it does so at the state’s flat 4.95% rate. Illinois builds your state tax bill on top of your federal adjusted gross income, so almost any interest the IRS treats as taxable becomes taxable in Illinois too. The two meaningful exceptions are interest from U.S. Treasury securities and interest from a short list of bonds issued by specific Illinois authorities.
How Illinois Calculates Taxable Interest
Illinois doesn’t write its own definition of income. The Illinois Income Tax Act starts with the federal adjusted gross income shown on your Form 1040 and then applies state-specific additions and subtractions to reach your Illinois base income.1Illinois General Assembly. 35 ILCS 5/203 – Base Income Defined Any interest that raised your federal tax bill will raise your Illinois bill too, unless a specific state subtraction applies. Illinois then taxes that base income at a flat 4.95%, regardless of how much you earned.2Illinois Department of Revenue. Income Tax Rates
Interest Income That Illinois Taxes
Most interest from private-sector sources is fully taxable in Illinois. The common categories:
- Interest on savings accounts and CDs at banks and credit unions.
- Interest on money market accounts, which are treated like savings accounts for tax purposes.
- Interest payments on corporate bonds, which flow through your federal AGI into your Illinois base income.
- Interest on out-of-state municipal bonds.
That last one surprises a lot of filers. Municipal bond interest is usually free from federal tax, and people assume the state treatment follows. Illinois goes the other way. Municipal interest that was excluded from your federal AGI gets added back as a state modification unless the bond falls within a specific Illinois exemption.1Illinois General Assembly. 35 ILCS 5/203 – Base Income Defined Bonds issued by other states almost never qualify.
Interest Income That Illinois Does Not Tax
U.S. Treasury Securities
Interest from U.S. Treasury bonds, bills, notes, certificates, and savings bonds (including Series I and Series EE) is exempt from Illinois tax. Federal law prohibits states from taxing interest on U.S. government obligations.3Office of the Law Revision Counsel. 31 USC 3124 – Exemption from Taxation Illinois honors that by allowing a subtraction on your state return for the full Treasury interest amount included in your federal AGI.4Legal Information Institute. Illinois Admin Code Title 86 100.2470 – Subtraction of Amounts Exempt from Taxation Interest from U.S. agency securities often qualifies too, though the rules vary by agency.
Specific Illinois Authority Bonds
Illinois exempts interest from bonds issued by a defined list of state and local authorities, and the list is narrower than most people expect. Being federally tax-free is not enough. Only bonds from authorities where the Illinois legislature has specifically enacted an exemption qualify.5Illinois Department of Revenue. Pub-101, Income Exempt from Tax
The exempt list includes bonds from entities such as the Illinois Housing Development Authority, the Illinois Sports Facilities Authority, certain Illinois Finance Authority bonds, and several regional economic development authorities. Each exemption carries its own conditions. Illinois Finance Authority bonds, for example, are only exempt when issued under specific articles of the Illinois Finance Authority Act. The Illinois Department of Revenue lists everything in Publication 101, and checking it before assuming an exemption applies is worth the few minutes.
Interest Earned Inside Retirement Accounts
Interest that accrues inside a traditional IRA, 401(k), or similar tax-deferred account doesn’t hit your federal return until you take a withdrawal.6Internal Revenue Service. Traditional IRAs Because Illinois starts with your federal AGI, it stays invisible at the state level until then. When you take distributions later, the amount enters your federal AGI and flows through to your Illinois return.
Roth IRAs work the opposite way. Qualified Roth distributions are excluded from federal AGI entirely, so Illinois never sees them. Interest earned inside a Roth escapes both federal and state tax as long as you meet the withdrawal rules.
How to Claim Interest Subtractions on Your Return
Illinois will not remove Treasury or exempt-bond interest for you. You claim the subtraction on Schedule M (Other Additions and Subtractions for Individuals), which feeds into Form IL-1040.7Illinois Department of Revenue. 2025 IL-1040 Schedule M Instructions Treasury interest goes on Line 22 of Schedule M.8Illinois Department of Revenue. Illinois Income Tax Schedule M – Other Additions and Subtractions for Individuals If your interest income required you to file federal Schedule B (over $1,500), attach a copy. Your Schedule M total then transfers to Line 7 of Form IL-1040 and reduces your Illinois base income before the 4.95% rate is applied.
Pull your 1099-INT forms first. Box 3 reports Treasury interest separately from other interest, which makes the subtraction easy to identify. For Illinois authority bonds, you may need to check the bond documentation itself to confirm it falls within a statutory exemption.
Penalties for Unreported Interest
Illinois individual returns are due April 15, and you can file through MyTax Illinois or by mail.9Illinois Department of Revenue. File Form IL-1040, Individual Income Tax Return, on MyTax Illinois If you underreport interest or file late, the penalty scales with delay. Pay within 30 days of the due date and it’s 2% of the unpaid amount. Wait longer, but pay before the Department of Revenue opens an audit, and it becomes 10%. Once an audit begins the penalty is 20%, dropping to 15% if you pay in full within 30 days of the audit results. Interest on the unpaid balance runs on top of those penalties.
A missing 1099-INT is one of the most common reasons Illinois sends a notice, because the IRS shares that data with state agencies. If you spot unreported interest after filing, amending quickly keeps you at the low end of the penalty scale.