Illinois retirement taxes are unusually light on income and heavier on almost everything else. The state’s flat 4.95% income tax does not apply to Social Security, pensions, IRA withdrawals, 401(k) distributions, or most other qualified retirement income. Property taxes are among the highest in the country, though several relief programs are available to residents 65 and older, and Illinois imposes its own estate tax on estates above $4 million.
Retirement Income Illinois Does Not Tax
Illinois begins its income tax calculation from your federal adjusted gross income and then subtracts most retirement income right back out. Under 35 ILCS 5/203, the following categories are fully removed from your Illinois base income if they were included in your federal return:1Illinois General Assembly. Illinois Code 35 ILCS 5/203 – Base Income Defined
- Social Security benefits, to the extent taxed federally
- Railroad retirement benefits
- Public and private pensions, including military retirement pay
- 401(k) and 403(b) distributions
- Traditional IRA distributions taxed under IRC Section 408
- 457 deferred compensation from state and local government plans
- Amounts included in federal income from converting a traditional IRA to a Roth IRA
Qualified Roth IRA distributions don’t appear on the list because they never enter your federal adjusted gross income to begin with. There’s nothing for Illinois to tax and nothing to subtract.
Military retirees receive the same treatment as civilian pensioners. The Illinois Department of Revenue treats government retirement plans, including military plans, as fully exempt.2Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income?
Income Retirees Still Owe Illinois Tax On
The retirement subtraction covers distributions from qualified plans and Social Security. It does not shelter anything else. If you draw income from sources outside those categories, Illinois taxes it at the full 4.95% flat rate.3Illinois Department of Revenue. Income Tax Rates Common taxable categories for retirees include:
- Wages from part-time or consulting work, regardless of age
- Interest, dividends, and capital gains from taxable brokerage accounts
- Net rental income from investment property
- Self-employment or side-business income
The distinction matters in practice. A retiree living entirely on a pension and Social Security may owe zero Illinois income tax. A retiree with the same pension plus a rental duplex and some part-time consulting pays 4.95% on that non-retirement income. The subtraction applies only to the specific plan types named in the statute.
Claiming the Retirement Subtraction on Form IL-1040
You report the subtraction on Line 5 of Form IL-1040. The figures come from your federal return: IRA distributions on federal Line 4b, pension and annuity distributions on Line 5b, Social Security on Line 6b, and government retirement pay or deferred compensation that showed up as wages on federal Line 1z.4Illinois Department of Revenue. 2025 Form IL-1040 Instructions
A frequent error: entering the gross distribution instead of the taxable portion. Illinois subtracts only what the federal government actually taxed, not the total in Box 1 of your 1099-R. If your 1099-R shows $50,000 gross but only $40,000 is taxable federally, you enter $40,000 on Line 5. Schedule M is a separate matter, used for beneficiary shares of retirement income flowing through trusts or partnerships on a Schedule K-1, not for your own retirement distributions.
Property Tax Relief for Seniors
Illinois property taxes are high enough that homestead exemptions do real work for retirees on fixed incomes. Several programs stack, so you can qualify for more than one at a time.
Senior Citizens Homestead Exemption
Owners 65 or older who occupy their home as a primary residence receive an annual reduction in equalized assessed value. The reduction is $8,000 in Cook County and the collar counties, and $5,000 in the rest of the state.5Illinois General Assembly. Illinois Code 35 ILCS 200/15-170 – Senior Citizens Homestead Exemption The dollar savings depend on your local composite rate. At a 7% rate, an $8,000 reduction cuts your bill by roughly $560.
Senior Citizens Assessment Freeze
This one freezes the assessed value of your home so that later reassessments don’t push it up. For tax year 2026, you must be 65 or older with total household income of $75,000 or less.6Illinois General Assembly. Illinois Code 35 ILCS 200/15-172 – Low-Income Senior Citizens Assessment Freeze Homestead Exemption The threshold rose from $65,000, so seniors who were previously over the limit should check again. Household income means everyone in the home, not just the owner. The freeze locks the assessed value only; if your taxing district raises its rate, your bill can still climb. You must reapply each year using Form PTAX-340 through your county assessor.
Persons with Disabilities Homestead Exemption
Homeowners with a qualifying disability receive a separate $2,000 reduction in equalized assessed value regardless of age, and it stacks with the senior homestead exemption if you qualify for both.7Illinois Department of Revenue. Property Tax Relief – Homestead Exemptions, PTELL, and Senior Citizens Real Estate Tax Deferral Program
Senior Citizens Real Estate Tax Deferral Program
When the exemptions still leave a bill you can’t cover, the deferral program works like a low-interest loan from the state. Qualifying seniors can defer up to $7,500 in property taxes each year at 3% simple annual interest. The state pays the county, and you repay the state when the home is sold or transferred.8Illinois Department of Revenue. Senior Citizens Real Estate Tax Deferral Program Frequently Asked Questions
For tax year 2026, eligibility requires:
- Age 65 or older by June 1 of the application year
- Total household income of $77,000 or less
- Ownership and occupancy of the home for at least three consecutive years
- No delinquent property taxes or special assessments
- Adequate fire or casualty insurance on the property
The deferred balance, including accrued interest and lien fees, cannot exceed 80% of your equity. The deferral creates a lien on the home, so it fits seniors who plan to age in place and hold substantial equity. Heirs should know the balance is settled from the sale proceeds or the estate.
Sales Tax, Groceries, and Prescriptions
Illinois eliminated its 1% statewide grocery tax on January 1, 2026. Groceries for the purpose of the rule means food for off-premises consumption; prepared foods, candy, soft drinks, and alcohol are excluded.9Illinois Department of Revenue. Sales Tax Rate Information for Food and Drugs (PIO-115)
Local governments received authority to impose their own 1% grocery tax to replace the lost revenue, and some municipalities did so immediately while others did not. Whether you actually see the savings depends on where you shop. Prescription and qualifying over-the-counter medicines stay at the reduced 1% state rate. General merchandise remains at the 6.25% state rate plus local add-ons, which can push combined rates above 10% in parts of the state.
The Illinois Estate Tax
Illinois imposes its own estate tax on residents whose estates exceed $4 million. That threshold sits well below the federal exemption, so many estates that owe nothing to the IRS still owe Illinois. The estate’s personal representative files Form 700 within nine months of the date of death.10Illinois Attorney General. Important Notice Regarding Illinois Estate Tax and Fact Sheet
The Cliff Effect
The $4 million figure is a threshold, not an exemption. An estate at $3.99 million owes nothing. An estate at $4.01 million is taxed on the full taxable estate, not just the amount above $4 million. An estate worth $4,040,000 owes roughly $290,800 in Illinois estate tax, with graduated rates climbing to a top marginal rate of 16% on estates above about $10 million.11Illinois Attorney General. State Death Tax Credit Table Planning around the threshold is worthwhile whenever your estate is close to it.
No Spousal Portability
Illinois does not let a surviving spouse inherit the unused portion of a deceased spouse’s exemption. At the federal level, married couples can effectively double the exemption by porting the first spouse’s unused amount to the survivor. Illinois has no equivalent rule. If the first spouse leaves everything to the survivor, the transfer itself is tax-free under the marital deduction, but the first spouse’s $4 million Illinois exemption is lost. When the surviving spouse dies, only one $4 million exemption shields the combined estate. Couples with combined assets approaching $8 million often use trust-based planning to preserve both exemptions.12Illinois General Assembly. Illinois Code 35 ILCS 405 – Illinois Estate and Generation-Skipping Transfer Tax Act