Illinois does not tax pension income. Under Section 203 of the Illinois Income Tax Act, distributions from qualified retirement plans, traditional and Roth IRAs, government and military pensions, and the federally taxed portion of Social Security are all subtracted from your Illinois base income, which zeros out the state’s 4.95% flat income tax on those funds.1Illinois General Assembly. 35 ILCS 5/203 – Base Income Defined2Illinois.gov. Income Tax Rates You may still need to file an IL-1040 to claim the subtraction, even when the result is no tax owed.
The mechanics are simple. Illinois starts with your federal adjusted gross income, lets you subtract qualifying retirement income that was already included in that federal figure, and then applies the 4.95% rate to whatever is left. For a retiree whose income is entirely pensions and Social Security, what’s left is usually zero. The subtraction only covers the federally taxed portion of your retirement income. If part of a distribution wasn’t included in your federal AGI because you already paid tax on those contributions, there’s nothing to subtract on the state side because it was never in your base income to begin with.3Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income?
What Retirement Income Qualifies
The subtraction keys off the federal tax code’s definition of qualified plans, not where you earned the pension. Publication 120 from the Illinois Department of Revenue lists the eligible categories:4Illinois Department of Revenue. Pub-120, Retirement Income
- Qualified employer plans such as 401(k) and 403(b) plans meeting the requirements of IRC Sections 402 through 408.
- Traditional IRAs, SEP plans, and Keogh plans. Amounts from a traditional IRA rolled over into a Roth IRA also qualify.
- Federal, state, and local government pensions, including military retirement pay and government disability plans.
- State and local government deferred compensation plans paid under IRC Section 457.
- The federally taxed portion of Social Security benefits and railroad retirement benefits.1Illinois General Assembly. 35 ILCS 5/203 – Base Income Defined
- Retirement payments to retired partners that are excluded from self-employment income under IRC Section 1402.
- Capital gains from a lump-sum distribution of appreciated employer securities, to the extent the gains reflect net unrealized appreciation at the time of distribution.
- Interest realized on the redemption of U.S. retirement bonds.
Two points surprise people. First, out-of-state pensions qualify. If you retired from a job in another state and now live in Illinois, your pension distributions still qualify as long as the plan meets the federal definition of a qualified retirement or government pension plan.3Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income? Second, early distributions still qualify. Even if you take money out before age 59½ and owe a federal early withdrawal penalty, Illinois lets you subtract that distribution from your state base income.4Illinois Department of Revenue. Pub-120, Retirement Income The federal penalty is a separate matter with the IRS.
What Doesn’t Qualify
Not every payment you receive after you stop working counts as exempt retirement income. The subtraction is tied to specific sections of the Internal Revenue Code, so distributions from plans that don’t meet those definitions remain part of your Illinois taxable base.
The most common example is a non-qualified deferred compensation plan. Many executives receive deferred compensation under arrangements governed by IRC Section 409A or similar non-qualified structures. Because these plans fall outside the IRC Sections 402 through 408 framework referenced in the Illinois statute, distributions from them are subject to the state’s 4.95% income tax.1Illinois General Assembly. 35 ILCS 5/203 – Base Income Defined If you’re unsure, ask your former employer or plan administrator whether the plan is a qualified plan under IRC Sections 402 through 408.
Other income sources sometimes confused with retirement income also remain taxable. Rental income, investment dividends, capital gains outside of the employer securities lump-sum rule, and income from post-retirement consulting or part-time work are all subject to Illinois income tax in full. The subtraction applies to retirement plan distributions and Social Security, not to every dollar received by someone who happens to be retired.
Do You Still Have to File an Illinois Return?
If you were required to file a federal income tax return, you must also file an Illinois Form IL-1040, even if your entire income is pensions and Social Security and you expect to owe nothing.5Illinois Department of Revenue. Filing Requirements The return is where you claim the subtraction. Without filing, the state has no record that your income qualifies.
If you weren’t required to file a federal return, you still need to file an IL-1040 when your Illinois base income after all subtractions exceeds your personal exemption allowance. For tax year 2025 returns filed in 2026, the personal exemption is $2,925 per person, with an additional $1,000 if you are 65 or older.6Illinois Department of Revenue. What Is the Illinois Personal Exemption Allowance? A married couple filing jointly where both spouses are 65 or older has a combined exemption of $7,850. For most retirees whose income is entirely from qualifying sources, base income after subtractions drops to zero, well below any threshold.
How to Claim the Subtraction
The retirement income subtraction is reported on Line 5 of Form IL-1040. You enter the total amount of qualifying retirement and Social Security income that was included in your federal adjusted gross income.4Illinois Department of Revenue. Pub-120, Retirement Income Schedule M, which handles other additions and subtractions, is a separate form used for different adjustments.7Illinois Department of Revenue. 2025 IL-1040 Schedule M Instructions The retirement subtraction itself goes directly on the IL-1040, not on Schedule M.
To fill in Line 5 accurately, pull your federal Form 1040, which shows pension and Social Security amounts on Lines 4b, 5b, and 6b, along with any Forms 1099-R you received from plan administrators.8Illinois Department of Revenue. 2025 IL-1040 Instructions The 1099-R includes a distribution code in Box 7 that identifies the type of payment. Codes for normal distributions, early distributions, early distributions with exceptions, and disability payments can all produce subtraction-eligible income.9Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498 What matters is whether the distribution comes from a qualifying plan type, not which code appears on the form.
Deadlines and Filing Options
For tax year 2025, the deadline to file your IL-1040 and pay any tax owed is April 15, 2026. If you need more time, the extended filing deadline is October 15, 2026.10Illinois Department of Revenue. What’s New for Illinois Income Taxes An extension gives you more time to file, not more time to pay. If you owe tax on non-retirement income, pay by April 15 to avoid penalties and interest.
You can file electronically through the MyTax Illinois portal at no cost. The portal accepts returns with or without a MyTax Illinois account and covers current-year and several prior-year returns.11Illinois Department of Revenue. File Form IL-1040 on MyTax Illinois Paper returns go to the Illinois Department of Revenue at the mailing address in the IL-1040 instructions, which differs depending on whether you’re enclosing a payment.8Illinois Department of Revenue. 2025 IL-1040 Instructions Paper takes significantly longer to process, and the state warns against mailing a paper copy if you’ve already filed electronically.