Does Illinois Tax Retirement Income? What’s Exempt and Taxed

Illinois does not tax most retirement income. Social Security benefits, pension payments, 401(k) and IRA withdrawals, government deferred compensation, and military retirement pay are all subtracted from your Illinois taxable income before the state’s 4.95 percent flat rate is applied.¹² That makes Illinois one of the friendlier states for retirees on income tax, though a handful of income types stay taxable and other state taxes still deserve a look.

What Retirement Income Is Exempt

The exemption works through a subtraction in the Illinois Income Tax Act. You start with your federal adjusted gross income, then subtract qualifying retirement distributions before the state tax rate hits.² The subtraction applies only to the federally taxed portion of each distribution, meaning the amount already included on your federal return.

These categories qualify:

Social Security and railroad retirement benefits included in your federal return under Internal Revenue Code Sections 72(r) or 86.
Pensions and annuities from both public and private plans, whether paid as monthly checks or a lump sum from a qualified trust.
Withdrawals from 401(k) and 403(b) plans.
Distributions from traditional and Roth IRAs, including amounts converted from a traditional IRA to a Roth IRA.
Eligible Section 457 government deferred compensation, including the State of Illinois Deferred Compensation Plan.³
Military retirement pay from any branch of the uniformed services, which falls under the subtraction for governmental retirement plans.

For a retiree whose income comes almost entirely from these sources, Illinois income tax liability is often zero.

What Illinois Still Taxes

Not every dollar a retiree receives is exempt. The following remain subject to the 4.95 percent rate:

Non-qualified deferred compensation. If a plan doesn’t meet the requirements of IRC Sections 401(a), 403(a), 403(b), 408, or 457, the subtraction doesn’t reach it. These are often executive supplemental retirement arrangements, and distributions are taxed as ordinary income at the state level.²
Wages and self-employment income. Part-time work or a side business is taxable at the standard rate.
Investment income. Interest, dividends, capital gains, and rental income are fully taxable. Retirees drawing meaningfully from a taxable brokerage account or rental property should plan for state tax on that income.

Early Withdrawals Still Qualify

A common point of confusion: the Illinois subtraction is not conditioned on your age. A 401(k) or IRA distribution taken before age 59½ is reported under the same Internal Revenue Code sections as any other distribution, so it still qualifies for the Illinois subtraction.²⁴ You will still owe the IRS the 10 percent federal early withdrawal penalty where it applies, but Illinois does not impose its own penalty or deny the subtraction because of your age.

How to Claim the Subtraction

Each plan or account that paid you during the year sends a Form 1099-R showing the gross distribution, the taxable portion, and any federal tax withheld. The taxable portion is the figure you use.

On Form IL-1040, eligible retirement income is entered directly on Line 5, which reduces your base income before the tax is calculated.⁵ The 2025 Illinois return is due April 15, 2026, with an automatic extension to October 15, 2026, for filing. Any tax owed is still due by April 15 to avoid interest and penalties.⁶

If You Move In or Out of Illinois

Part-year residents file Schedule NR alongside the IL-1040. Retirement income received while you were an Illinois resident is reported and then subtracted; retirement income received after you leave the state is excluded entirely.⁷ Because Illinois subtracts qualified retirement income either way, the timing of a move rarely creates a state tax hit on pension or IRA money.

Once you are a full nonresident, Illinois cannot tax your retirement income at all. Federal law at 4 U.S.C. § 114 bars any state from imposing income tax on the retirement income of a nonresident, and the Schedule NR instructions direct nonresidents to leave the IRA and pension lines blank in the Illinois column.⁸⁷

Other Illinois Taxes Retirees Still Face

Income tax isn’t the whole picture. Illinois property taxes are among the highest in the country, and the state imposes its own estate tax at a threshold well below the federal one.

Senior Citizens Homestead Exemption

Homeowners 65 or older can reduce the equalized assessed value of a primary residence by up to $8,000 in Cook County and the counties bordering it, or up to $5,000 in other counties.⁹ There is no income limit. Apply through your county assessment office.

Senior Citizens Assessment Freeze

This program freezes your property’s equalized assessed value at its qualifying-year level, so later increases don’t drive up your bill. For the 2026 tax year, total household income must be $75,000 or less, and you reapply each year with Form PTAX-340.⁹

Senior Citizens Real Estate Tax Deferral Program

If you are at least 65 by June 1 and your household income for 2026 is no more than $77,000, you can defer up to $7,500 per year in property taxes.¹⁰ The state pays the taxes and places a lien on the property for the deferred amount plus interest. You must have owned and lived in the home for at least three years, have no delinquent property taxes, and keep adequate insurance on the property.

Illinois Property Tax Credit

At any age, Illinois residents who pay property tax on a primary residence can claim a credit on Form IL-1040 equal to 5 percent of the property tax paid. The credit is available to single filers with adjusted gross income up to $250,000 and joint filers up to $500,000.¹¹ Because most retirement income is subtracted from Illinois base income, many retirees fall comfortably within those limits.

Illinois Estate Tax

Illinois imposes an estate tax on estates valued at more than $4 million after deductions and adjusted taxable gifts.¹² That threshold is far below the federal exemption, which exceeds $13 million for 2026, so an estate that owes nothing to the IRS can still face an Illinois bill. Rates run on a graduated schedule from 0.8 percent to 16 percent on the amount above the exemption, and when only part of the estate is located in Illinois the tax is prorated. Illinois does not impose a separate inheritance tax, so beneficiaries are not individually taxed on what they receive.

1
Illinois Department of Revenue. Income Tax Rates
2
Illinois General Assembly. Illinois Compiled Statutes 35 ILCS 5/203
3
State of Illinois. State of Illinois Deferred Compensation Plan
4
Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income?
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Illinois Department of Revenue. 2025 IL-1040 Schedule M Instructions
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Illinois Department of Revenue. FY 2026-15 – What’s New for Illinois Income Taxes
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Illinois Department of Revenue. IL-1040 Schedule NR Instructions
8
Office of the Law Revision Counsel. 4 U.S. Code 114 – Limitation on State Income Taxation of Certain Pension Income
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Illinois Department of Revenue. Property Tax – Exemption Information (PIO-74)
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Illinois Department of Revenue. Senior Citizens Real Estate Tax Deferral Program (PIO-64)
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Illinois Department of Revenue. Pub-108, Illinois Property Tax Credit
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Illinois Attorney General. Important Notice Regarding Illinois Estate Tax and Fact Sheet