Illinois Retirement Income Tax: what illinois taxes in retirement
2026 law · reviewed September 5, 2026
| Income | Illinois treatment | Note | Authority |
|---|---|---|---|
| Social Security benefits | Subtracted (not taxed) | The federally taxed portion, from Form 1040 line 6b | 35 ILCS 5/203(a)(2)(L) |
| Qualified employee plans: 401(k), 403(b), pensions | Subtracted (not taxed) | IRC §§ 402 through 408 plans, including early distributions | 35 ILCS 5/203(a)(2)(F) |
| IRA and SEP distributions | Subtracted (not taxed) | Including a traditional-to-Roth conversion | 35 ILCS 5/203(a)(2)(F) |
| Government and military retirement and disability | Subtracted (not taxed) | Federal, state, local, and military plans | 35 ILCS 5/203(a)(2)(F) |
| State and local government deferred compensation (§ 457) | Subtracted (not taxed) | Governmental plans only | 35 ILCS 5/203(a)(2)(F) |
| Railroad Retirement | Subtracted (not taxed) | Tier I and Tier II | 35 ILCS 5/203(a)(2)(L) |
| Wages and self-employment income | Taxed at 4.95% | At the flat rate | 35 ILCS 5/201 |
| Interest, dividends, and capital gains | Taxed at 4.95% | Including gains on a home sale above the federal exclusion | 35 ILCS 5/201 |
| Nonqualified annuities and private deferred compensation | Taxed at 4.95% | Not from a qualified plan, so not subtracted | Publication 120 |
| Rental and business income | Taxed at 4.95% | At the flat rate | 35 ILCS 5/201 |
| Third-party sick pay | Taxed at 4.95% | Named by the Department as not subtractable | Publication 120 |
Retirement-age income by Illinois treatment, 2026, with the statute or publication for each line (35 ILCS 5/203(a)(2); Publication 120).
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