Illinois leaves retirement income alone. Here is the line.
Social Security, pensions, and IRA withdrawals come off the Illinois return before the rate is applied; wages, interest, dividends, and gains do not. Enter both and see the bill, what the subtraction is worth, and the statute behind each line.
2026 rate, exemptions, and subtraction · Last reviewed September 5, 2026 · Facts · The table · Methodology
https://consideratecapital.com/tools/illinois-retirement-income-tax
Social Security, pensions, and IRA or 401(k) withdrawals, using the amounts that count as taxable on your federal return.
Wages, interest, dividends, capital gains, rents, and annuities you bought yourself. This is the income Illinois does tax.
- Income Illinois starts from, after the subtraction
- $20,000
- Your federal adjusted gross income of $120,000, less the retirement income
- Exemptions taken off before the tax
- $7,850
- $2,925 per person, plus $1,000 more for each person 65 or older
- Income taxed at the flat 4.95% rate
- $12,150
- What is left after the exemptions
Illinois starts from your federal adjusted gross income. It subtracts retirement income from employer plans, IRAs, government and military pensions, and Social Security. It then allows $2,925 per person, and $1,000 more for each person 65 or older, and taxes the rest at a flat 4.95%. What stays taxable is the same income a working household would have, such as wages, interest, dividends, gains, and rents.
This follows the Illinois income tax rules for retirement income, using the 2026 rate and exemptions and the subtraction as Illinois Publication 120 describes it. It assumes you lived in Illinois all year, and it leaves out credits (property tax, K-12 education, earned income), other additions or subtractions, and federal tax. Illinois has no county or city income tax. An annuity you bought yourself or a private deferred compensation plan belongs in other income. Educational, not advice.
This is a simplified model, not your actual tax return or plan. It only knows what you type in, leaves out rules that may apply to you, and cannot weigh the other facts and trade-offs a real decision depends on. Before you act, talk with a professional who knows your whole situation.
Built by Joshua Mangoubi, CFA, MBA. By using this tool you agree to the tool terms, which include that results vary with each use and over time. Cite this tool, or take a table or chart
How it counts. Federal adjusted gross income less the retirement subtraction, less the exemptions, at the flat rate: the arithmetic of Form IL-1040, with the statute or the Department's publication cited for every line of the table below.
What it assumes. Full-year residents, no credits, no other additions or subtractions, and a clean split between retirement income from qualified plans and everything else. The credits and the edge cases (a nonqualified annuity, private deferred compensation, part-year residency) are a CPA's work; the table below says which is which.
Where we fit in. We integrate tax considerations into your investment strategy and collaborate with estate attorneys and CPAs to ensure your plan is coordinated. We are not a law firm or accounting firm, so we do not provide legal or tax advice. Everything in this material is for educational purposes, based on primary sources. Before taking any action, please consult the appropriate professionals to apply these ideas to your situation.
The facts, in one place.
Six quotable sentences on Illinois and retirement income, 2026.
- 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.
- 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)).
- 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.
- 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.
- Early distributions from qualified plans and IRAs are subtracted as well; the federal 10 percent penalty is federal only.
- 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.
What Illinois taxes in retirement.
Every common income type, subtracted or taxed, cited.
| 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 |
How the subtraction works.
Illinois computes tax from federal adjusted gross income, so whatever the federal return counts as income is the starting point. From that, 35 ILCS 5/203(a)(2)(F) subtracts the federally taxed amounts received from qualified employee plans, IRAs, and governmental retirement and disability plans, and paragraph (L) subtracts Social Security and Railroad Retirement benefits. The result is base income; less the exemptions, it is net income; the flat rate applies to that.
What is left in the base is what a working household would owe on too: wages, interest, dividends, capital gains, rents, and retirement income that is not from a qualified plan. A nonqualified annuity, deferred compensation from a private employer, and third-party sick pay are the three the Department names. The distinction is the plan, not the age: an early distribution from an IRA is subtracted like any other.
Methodology.
- Inputs. Retirement income (the federally taxed amounts of Social Security, pensions, and IRA or 401(k) withdrawals), other income, filing status, and whether everyone on the return is 65 or older.
- Base income. Federal adjusted gross income, taken as the sum of the two inputs, less the retirement subtraction, which is the whole of the first input.
- Exemptions. 2,925 per person for 2026 (35 ILCS 5/204(b) as indexed; Bulletin FY 2026-15), plus 1,000 for each person 65 or older (5/204(d)).
- Tax. Net income at 4.95 percent (35 ILCS 5/201(b)(5.4)). The saving is the tax the same income would owe with the subtraction removed.
- Validation. Three pinned cases (a couple both over 65, an all-retirement-income return, a wage earner under 65) and a check that the saving is never negative. A transcription error fails the build.
- Not modeled. Credits (the property tax credit, the K-12 credit, the earned income credit), other additions and subtractions, part-year residency, the exemption phase-out for very high incomes, and federal tax. A nonqualified annuity or private deferred compensation belongs in other income. Educational, not advice.
Sources.
- 1. Illinois General Assembly, 35 ILCS 5/201(b)(5.4) — Tax imposed; rate for individuals, trusts, and estates. The 4.95 percent rate on net income for taxable years beginning on or after July 1, 2017. Retrieved September 5, 2026; verified September 5, 2026.
- 2. Illinois General Assembly, 35 ILCS 5/203(a)(2)(F) and (L) — Base income; subtractions for retirement income and for Social Security and Railroad Retirement benefits. The subtraction of amounts included in federal AGI under IRC §§ 402(a), 402(c), 403(a), 403(b), 406(a), 407(a), and 408, distributions from governmental retirement and disability plans, and retirement payments to retired partners (F); and of Social Security and Railroad Retirement benefits (L). Retrieved September 5, 2026; verified September 5, 2026.
- 3. Illinois General Assembly, 35 ILCS 5/204 — Standard exemption; the additional exemption at 65 or for blindness. The basic exemption and its cost-of-living indexing rounded down to $25; the additional $1,000 for a taxpayer or spouse 65 or older, and again for blindness. Retrieved September 5, 2026; verified September 5, 2026.
- 4. Illinois Department of Revenue, Informational Bulletin FY 2026-15, What's New for Illinois Income Taxes (December 2025). That the exemption allowance for tax year 2026 is $2,925. Retrieved September 5, 2026; verified September 5, 2026.
- 5. Illinois Department of Revenue, Publication 120, Retirement Income (R-12/25). The Department's plain-language list of what may be subtracted on Line 5 (qualified plans including 401(k), IRAs and SEPs including Roth conversions, Social Security, Railroad Retirement, government and military plans, governmental § 457 plans, early distributions) and what may not (third-party sick pay, non-governmental deferred compensation and disability plans, ten-year-averaged lump sums). Retrieved September 5, 2026; verified September 5, 2026.
Revision history.
The record's history.
- September 5, 2026
- First release of the Illinois retirement income tax record and tool: the 4.95 percent rate, the 2026 exemption of $2,925 and the $1,000 addition at 65, and the retirement income subtraction as the statute and Publication 120 state it.
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