Illinois does not tax military retirement pay. The state’s retirement income subtraction removes military pensions from Illinois taxable income in full, so none of your retired pay is hit by the 4.95% flat state income tax. The exemption applies regardless of your branch, rank, age, or total income.
The legal basis is 35 ILCS 5/203(a)(2)(F), which allows a subtraction for distributions under any retirement or disability plan for employees of a governmental agency, along with distributions from qualified plans under Internal Revenue Code Sections 402(a), 403(a), 403(b), and 408. Military retired pay is a distribution from a federal government retirement plan, so it qualifies.1Illinois General Assembly. Illinois Code 35 ILCS 5/203 – Base Income Defined
What Military Income Illinois Treats as Exempt
The subtraction is broad. It covers retired pay from the Army, Navy, Air Force, Marine Corps, Space Force, and Coast Guard, and it extends to retirees from the National Guard and Reserves. Disability retirement pay that the federal government treats as pension income also qualifies. There is no age requirement and no income cap.2Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income?
A few related income streams get the same treatment:
- Survivor Benefit Plan annuities paid to spouses and dependents are distributions from a federal government retirement plan and fall under the same subtraction.1Illinois General Assembly. Illinois Code 35 ILCS 5/203 – Base Income Defined
- Thrift Savings Plan distributions are exempt because the TSP is a qualified retirement plan covered by the Internal Revenue Code sections listed in subsection (F).2Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income?
- VA disability compensation never appears on your federal return in the first place, so there is nothing to subtract on the Illinois return.3VA News. Tax Season Guidance for Veterans
- Concurrent Retirement Disability Pay (CRDP) and Combat-Related Special Compensation (CRSC) retirees get the same result at the state level. Whatever portion of your retired pay is federally taxable is removed from your Illinois taxable income by the subtraction.4Defense Finance and Accounting Service. December 2025 Retiree Newsletter – CRDP CRSC Open Season FAQs
Illinois also exempts the federally taxed portion of Social Security, traditional IRA distributions, 401(k) and 403(b) withdrawals, other government pensions, and railroad retirement income, so most retirees find their entire retirement picture is state-tax-free.2Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income?
How to Claim the Exemption on IL-1040
The subtraction goes on Form IL-1040, Line 5. This is where filers often slip up. Schedule M handles a different set of subtractions reported on Line 7, including active-duty military pay. Military retirement income is not a Schedule M item; it is subtracted directly on the main return.5Illinois Department of Revenue. Additions and Subtractions for Individual Income Tax
Pull your Form 1099-R from DFAS. Box 1 shows the gross distribution; Box 2a shows the taxable amount reported to the IRS.6Internal Revenue Service. Instructions for Forms 1099-R and 5498 The Box 2a figure is what flows into your federal adjusted gross income, and it is the amount you enter on IL-1040, Line 5 to back it out of state taxable income.
Box 7 shows the distribution code. Code 7 is the standard code for military pensions and survivor benefit annuities. Code 3 is used for disability retirement.6Internal Revenue Service. Instructions for Forms 1099-R and 5498 Both qualify for the Illinois subtraction. If you are a Reservist with drill pay or other active-duty wages on top of your pension, that separate military pay subtraction goes on Schedule M, Line 21.7Illinois Department of Revenue. 2025 IL-1040 Schedule M Instructions
Most Illinois residents file electronically through MyTax Illinois. The deadline for 2025 returns is April 15, 2026. Keep your 1099-R statements in case the Department of Revenue asks for verification.
If You Already Paid Illinois Tax on Military Retirement in a Prior Year
If you filed an Illinois return in a previous year without claiming the retirement income subtraction, you can recover the tax by filing Form IL-1040-X, the Amended Individual Income Tax Return. The remedy specifically applies when you failed to subtract retirement income reported on lines 4b, 5b, or 6b of your federal Form 1040.8Illinois Department of Revenue. Amending My Return (Form IL-1040)
The deadline to claim a refund is the latest of three dates: three years after the extended due date of the original return, three years after the date you actually filed, or one year after the date you paid the Illinois tax. If you file within three years after your original return, the refund is limited to payments made within three years and six months before you filed the amended claim.8Illinois Department of Revenue. Amending My Return (Form IL-1040) For a parallel federal correction, the general window is three years from filing or two years from paying the tax, whichever is later, with additional time for veterans who served in a combat zone.9Internal Revenue Service. Time You Can Claim a Credit or Refund
Active-Duty and Combat Zone Pay Are Separate Categories
Two kinds of military income are often confused with retired pay but follow different rules. Active-duty military pay and National Guard compensation earned during service are handled under a separate Illinois provision and reported through Schedule M, not Line 5.1Illinois General Assembly. Illinois Code 35 ILCS 5/203 – Base Income Defined Combat zone pay is a federal exclusion: if you served in a designated combat zone during any part of a month, that month’s military pay is excluded from federal gross income and therefore never reaches your Illinois return.10Internal Revenue Service. Publication 3, Armed Forces Tax Guide Retired pay itself does not qualify for the combat zone exclusion, but it does not need to in Illinois, because the state exempts the pension outright.