Does Illinois Tax Retirement Income? Subtractions and Age 65 Rules

Illinois does not tax most retirement income. Social Security benefits, pension payments, 401(k) and 403(b) withdrawals, traditional IRA distributions, and government retirement pay are all subtracted from your Illinois taxable income, which means the state’s flat 4.95 percent rate effectively drops to zero on those dollars.¹ For a retiree whose income comes entirely from these sources, the Illinois income tax bill can be nothing at all.

The rule has limits, though, and the way you claim the subtraction matters. Here is what qualifies, what doesn’t, and how it lands on your return.

Retirement Income Illinois Exempts

The statutory subtraction covers nearly every common retirement plan. You can subtract the following from your Illinois base income:²

Social Security benefits, to the extent they appear in your federal adjusted gross income.
Distributions from qualified employer plans, including traditional 401(k) and 403(b) plans that meet Internal Revenue Code Sections 402 through 408.
Traditional IRA, SEP-IRA, and Keogh plan distributions. Amounts converted from a traditional IRA to a Roth IRA also qualify in the year the conversion is federally taxed.
Federal, state, and local government pensions, including military retirement and military disability pay.
Railroad retirement benefits, both Tier 1 and Tier 2.
Distributions from state or local government 457(b) deferred compensation plans.

Where the pension was earned does not matter. If you spent your career with a government employer in another state and retired to Illinois, that pension still qualifies for the subtraction.³

Inherited retirement accounts follow the same rule. When you take a distribution from an inherited traditional IRA or 401(k), the amount that lands in your federal adjusted gross income is subtracted on your Illinois return. The exemption tracks the federal tax treatment, not who originally owned the account.²

The “Federally Taxed Portion” Rule

Illinois does not exempt the gross amount of every retirement check. It exempts the federally taxed portion, meaning only what already appears in your federal adjusted gross income.²

For most traditional 401(k) and IRA withdrawals, the distinction makes no practical difference. The full distribution is usually federally taxable, so the full amount is subtracted on the Illinois return. Social Security is where the mechanics show. The federal government taxes between zero and 85 percent of your benefits depending on your total income. Only that federally taxed portion gets subtracted on the Illinois side. The untaxed portion never entered your Illinois income to begin with, so there is nothing to subtract.³

Qualified Roth IRA distributions work the same way in reverse. Because they are not included in federal income, they never appear on your Illinois return, and the subtraction is irrelevant. Either way, no Illinois tax.

Retirement-Like Income That Doesn’t Qualify

A few things look like retirement income but fall outside the subtraction. Distributions from nongovernmental deferred compensation plans, such as a private employer’s 457(f) or other nonqualified plan, are not exempt.³ Third-party sick pay does not qualify, even if it arrives after you stop working. And if you elect the special 10-year averaging method on federal Form 4972 for a lump-sum distribution, that income loses its Illinois subtraction.

The deciding question is always whether the plan meets the IRS definition of a qualified retirement plan under the relevant Internal Revenue Code sections. If you aren’t sure about a specific plan, the Illinois Department of Revenue suggests checking with your employer or plan administrator.⁴

What Retirees Still Pay Tax On

Retirement doesn’t make every dollar tax-free. The 4.95 percent flat rate still applies to non-retirement income, and retirees often have more of it than they expect.¹

Wages and self-employment income. Part-time jobs, consulting fees, and freelance work are fully taxable.
Investment income. Interest, dividends, and capital gains from selling property or securities all count.
Rental income. Rent on an investment property is taxable because it comes from real estate ownership, not a qualified retirement plan.
Business income from pass-through entities. If you own a share of a partnership, S corporation, or LLC, your portion of the entity’s income is taxable on your Illinois return regardless of age or retirement status.⁵

Retirees with meaningful investment or business income often have no employer withholding. If you expect your Illinois tax liability to exceed $1,000 after withholding and credits, you have to make quarterly estimated payments. One narrow exception: if you are 65 or older and permanently living in a nursing home, estimated payments are not required.⁶

How to Claim the Subtraction on Your Return

The retirement income subtraction goes on Form IL-1040, Line 5. This trips people up because the form also has Schedule M for other additions and subtractions, but Schedule M’s instructions specifically say not to enter retirement income there.⁷

Start with your federal adjusted gross income, which carries over to IL-1040, Line 1. Then enter the total federally taxed retirement income on Line 5. The amounts should match the federal return: IRA and pension distributions from federal Form 1040 Lines 4b and 5b, Social Security benefits from Line 6b, and government retirement pay reported as wages on Line 1z.⁴

Keep your 1099-R forms and your Social Security benefit statement (Form SSA-1099) handy. They show both the gross distribution and the taxable amount, and only the taxable amount belongs on Line 5. If the figures don’t match what the IRS received, expect the Illinois Department of Revenue to ask about it.

Form IL-1040 can be filed for free through MyTax Illinois, which processes faster than paper.⁸ Don’t file both electronically and on paper; duplicate returns cause delays.

Extra Exemption at Age 65

Illinois gives every taxpayer a personal exemption that reduces taxable base income. For tax year 2026, the standard personal exemption is $2,925.⁹ If you are 65 or older, you get an additional $1,000. On a joint return where both spouses are 65 or older, each gets the extra $1,000.¹⁰

The personal exemption phases out at high incomes. It disappears entirely if your federal adjusted gross income exceeds $500,000 on a joint return or $250,000 on any other filing status.¹⁰ For most retirees that ceiling is irrelevant, but high-income retirees with large investment portfolios can lose it.

One Caution About the Estate Tax

The income tax exemption does not carry over to the Illinois estate tax, which is worth knowing if you hold large retirement balances. Illinois has its own estate tax with a $4,000,000 exemption, and estates above that threshold can face rates reaching 16 percent.¹¹ Traditional IRA and 401(k) balances are counted in the taxable estate. The fact that Illinois leaves those accounts alone during your lifetime does not shield them from estate tax when you die.

1
Illinois Department of Revenue. Income Tax Rates
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Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income
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Illinois Department of Revenue. Pub-120, Retirement Income
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Illinois Department of Revenue. IL-1040 Instructions – Step 3 Base Income
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Illinois Department of Revenue. Pass-through Entity Information
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Illinois Department of Revenue. Estimated Income Tax Payments for Individuals
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Illinois Department of Revenue. IL-1040 Schedule M Instructions
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Illinois Department of Revenue. File Form IL-1040, Individual Income Tax Return, on MyTax Illinois
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Illinois Department of Revenue. FY 2026-15, Whats New for Illinois Income Taxes
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Illinois Department of Revenue. What Is the Illinois Personal Exemption Allowance
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Office of the Illinois Attorney General. Estate Tax Instruction Fact Sheet