Illinois does not tax pensions. The state’s 4.95 percent flat income tax exempts nearly every form of qualified retirement income, including traditional pensions, 401(k) and 403(b) distributions, traditional and Roth IRAs, military and government retirement pay, Social Security, and railroad retirement benefits. If retirement distributions are your only income, your Illinois income tax can be zero.
Which Retirement Income Illinois Exempts
The exemption lives in the Illinois Income Tax Act at 35 ILCS 5/203, which lets you subtract qualified retirement income from your federal adjusted gross income when calculating what Illinois taxes.1Illinois General Assembly. Illinois Compiled Statutes 35 ILCS 5/203 Base Income Defined The Illinois Department of Revenue confirms the following categories are exempt:2Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income?
- Qualified employee benefit plans, including 401(k), 403(b), and 457(b) plans
- Traditional IRAs, Roth IRAs (including conversions from traditional IRAs), SEP-IRAs, and SIMPLE IRAs
- Federal, state, and local government pensions, including military retirement pay
- The federally taxed portion of Social Security benefits
- Railroad retirement income reported on Form RRB-1099
- State and local government 457 deferred compensation plans
- Retirement payments to former partners
- U.S. retirement bond proceeds
- Lump-sum distributions, including distributions of appreciated employer securities
The subtraction equals the federally taxed amount of each distribution. Qualified Roth withdrawals that are already tax-free federally never enter your Illinois base income to begin with, so there is nothing to add back.
Age and employment status do not matter. What matters is the type of plan the money comes from. Self-employed people drawing from SEP-IRAs or SIMPLE IRAs get the same treatment as a career teacher drawing a pension. The subtraction covers both your contributions and the investment earnings on top of them.
What the Exemption Does Not Cover
Several income sources retirees often have remain fully taxable at 4.95 percent:3Illinois Department of Revenue. Income Tax Rates
- Wages, self-employment earnings, and consulting fees
- Interest from bank accounts, CDs, and most bonds
- Dividends from taxable brokerage accounts
- Capital gains on stocks, property, or other assets held outside a qualified plan
- Rental income from investment properties
- The earnings portion of non-qualified annuities purchased outside an employer plan or IRA
That last item catches people. A commercial deferred annuity bought on your own, outside an employer plan or IRA, does not fall under the Internal Revenue Code sections the statute lists, so Illinois taxes the earnings portion of each payment.
Early Withdrawals, Lump Sums, and Inherited Accounts
Early withdrawals from qualified plans before age 59½ are still exempt in Illinois. The federal 10 percent additional tax on early distributions is a separate federal obligation and does not change how Illinois treats the money.4Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions The distribution shows up in your federal AGI, and Illinois subtracts it back out.
Lump-sum distributions qualify on the same terms as monthly pension checks, including distributions paid in appreciated employer securities. A direct rollover from one qualified plan to another is generally not included in federal AGI in the first place, so no Illinois subtraction is needed.
Inherited retirement accounts work the same way. The statute allows a subtraction of “all amounts” included in federal income under the referenced IRC sections, without distinguishing between the original owner and a beneficiary.1Illinois General Assembly. Illinois Compiled Statutes 35 ILCS 5/203 Base Income Defined Whether you are a surviving spouse, an adult child emptying an inherited IRA within the 10-year window under the SECURE Act, or another designated beneficiary, distributions from a qualified inherited account are exempt from Illinois tax. Federal reporting rules for beneficiaries still apply.5Internal Revenue Service. Retirement Topics – Beneficiary
Social Security and Railroad Retirement
Illinois subtracts the full federally taxed amount of Social Security benefits, including the portion the IRS taxes at the 85 percent level for higher-income filers. There is no income cap, phase-out, or means test on the state side. Railroad retirement income reported on Form RRB-1099 follows the same path: included on your federal return, subtracted on your Illinois return.
How to Claim the Subtraction on Your Illinois Return
Illinois starts with your federal adjusted gross income, so your retirement distributions arrive on your state return already baked into Line 1. You take them out further down the form.6Illinois Department of Revenue. Step 2 – Income – IL-1040 Form Instructions
- Line 1 of Form IL-1040: your federal AGI, which includes the retirement income.
- Line 5 of Form IL-1040: your total eligible retirement income subtraction.
- Schedule M: attached to IL-1040 to itemize the subtraction and any other adjustments.
After the subtraction, the 4.95 percent rate applies only to what is left. You still have to file a return if your federal AGI exceeds the Illinois filing threshold, even when the subtraction brings your Illinois tax to zero.
If You Move Into or Out of Illinois
Part-year residents claim the subtraction for qualified retirement income received while living in Illinois, filing Form IL-1040 as a part-year resident.
If you leave Illinois for another state, federal law takes over. Under 4 U.S.C. § 114, no state may tax the retirement income of a person who is not a resident of that state.7Office of the Law Revision Counsel. Limitation on State Income Taxation of Certain Pension Income Illinois cannot tax your pension or qualified plan distributions after you move away, even if you earned the pension through decades of Illinois work. The federal protection covers qualified trusts, IRAs, 403(b) plans, 457 plans, government plans, and military retired pay.
Moving into Illinois from another state does not change anything either. The exemption attaches to the type of income, not where the work was performed.