Illinois Retirement Income Tax: the facts

1. Illinois taxes individual income at a flat 4.95% (35 ILCS 5/201(b)(5.4)), on net income after a $2,925 exemption per person for 2026, plus $1,000 for each taxpayer or spouse 65 or older.
2. Illinois does not tax Social Security benefits, pensions from qualified employee plans, IRA and SEP withdrawals (including a Roth conversion), government and military retirement, governmental § 457 deferred compensation, or Railroad Retirement: the federally taxed amounts are subtracted from the base (35 ILCS 5/203(a)(2)(F) and (L)).
3. It does tax wages, interest, dividends, capital gains, rents, and retirement income that is not from a qualified plan: a nonqualified annuity, private deferred compensation, third-party sick pay.
4. Example: a couple, both over 65, with $100,000 of Social Security and IRA withdrawals and $20,000 of interest and dividends pays Illinois $601. Were retirement income taxed like wages, the bill would be $5,551; the subtraction is worth $4,950 a year.
5. Early distributions from qualified plans and IRAs are subtracted as well; the federal 10 percent penalty is federal only.
6. Illinois has had the subtraction, in its present shape, since the 1980s, and a proposal to tax retirement income has not advanced in the General Assembly; the flat rate has stood at 4.95% since July 2017.

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