Does Illinois Tax Military Retirement? Exemptions and Filing Steps

Illinois does not tax military retirement pay. Every dollar of your military pension is subtracted out before the state’s flat 4.95% income tax is applied, under a provision of the Illinois Income Tax Act that shields federally taxed retirement income from state tax.¹ Branch, rank, age, and total income do not change the answer.

What the Exemption Covers

The legal basis is 35 ILCS 5/203(a)(2)(F), which allows a subtraction for distributions under any retirement or disability plan for employees of a governmental agency. Military retirement pay qualifies because it is a distribution from a federal government retirement plan.¹

The subtraction applies across the board. Retirees from the Army, Navy, Air Force, Marine Corps, Space Force, and Coast Guard are covered, as are retirees from the National Guard and Reserves. Disability retirement pay that the federal government treats as pension income also qualifies, and there is no age requirement and no income cap.² Survivor Benefit Plan payments to a spouse or dependent get the same treatment, because SBP annuities are distributions from the same federal retirement plan.¹

One boundary worth flagging: active-duty military pay and drill pay for Reservists are handled under a separate provision of the same statute and reported on a different line. If you are still serving and drawing a paycheck, that income has its own subtraction; it is not part of the retirement rule.¹

How to Claim It on Your Illinois Return

The subtraction goes on Form IL-1040, Line 5. This trips people up, because many other subtractions run through Schedule M and land on Line 7. Military retirement is not one of them; it is subtracted directly on the main return.³

Pull your Form 1099-R from DFAS. Box 1 shows the gross distribution and Box 2a shows the taxable amount reported to the IRS.⁴ The Box 2a figure is what flowed into your federal adjusted gross income, and that is the amount you subtract on Line 5 of the Illinois return.

Check Box 7 for the distribution code. Code 7 is the standard code for military pensions and survivor benefit annuities. Code 3 indicates disability retirement. Either code qualifies for the subtraction.⁴ If you also have active-duty military pay in the same year, that separate subtraction goes on Schedule M, Line 21.⁵ Keep your 1099-R statements in case the Department of Revenue asks for verification.

Other Retirement Income Illinois Also Exempts

Military retirees typically draw from more than one source, and Illinois exempts the federally taxed portion of most of them:

401(k), 403(b), and similar qualified employer-sponsored plans
Traditional IRA distributions, Roth conversions, and self-employed retirement plans
Federal, state, and local government retirement and disability plans, including military plans
The federally taxed portion of Social Security benefits
Railroad retirement income

The list comes directly from Illinois Department of Revenue guidance.² For retirees under the Blended Retirement System, Thrift Savings Plan distributions fall into this same category and are exempt at the state level. The TSP does not withhold Illinois state tax, which is a non-issue because there is no state tax to withhold.⁶

VA Disability, CRDP, and CRSC

VA disability compensation is tax-free at both the federal and state level. The VA excludes it from gross income, so it never appears on your federal return and there is nothing to subtract on the Illinois return.⁷

Concurrent payments change the federal picture but not the state one. Under Concurrent Retirement Disability Pay (CRDP), you receive full military retired pay from DFAS plus full VA disability from the VA. The retired pay portion is federally taxable and raises your federal taxable income.⁸ Illinois still exempts that retired pay, so the federal tax hit does not carry into your state return.

Combat-Related Special Compensation works differently. Retired pay is offset by the VA disability amount, and CRSC is issued separately as a non-taxable payment. The remaining retired pay from DFAS is federally taxable but again exempt in Illinois.⁸ Whichever path applies to you, no portion of your military retirement or disability income is taxed by Illinois.

What If You Missed the Subtraction on a Past Return

If you filed an Illinois return in a prior year and did not claim the retirement income subtraction, you can recover the overpaid tax by filing Form IL-1040-X. The amendment applies specifically to retirement income that appeared on lines 4b, 5b, or 6b of your original federal Form 1040 but was not subtracted on the Illinois return.⁹

The refund deadline is the latest of three dates: three years after the extended due date of the original return, three years after the date you actually filed it, or one year after the date you paid the Illinois tax. If you file within three years of the original return, the refund is limited to payments made within three years and six months before the amended claim.⁹ The federal window is separate: three years from filing or two years from paying, whichever is later, with additional time possible for veterans who served in a combat zone.¹⁰

1
Illinois General Assembly. Illinois Code 35 ILCS 5/203 – Base Income Defined
2
Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income?
3
Illinois Department of Revenue. Additions and Subtractions for Individual Income Tax
4
Internal Revenue Service. Instructions for Forms 1099-R and 5498
5
Illinois Department of Revenue. 2025 IL-1040 Schedule M Instructions
6
Thrift Savings Plan. Taking Money From Your Account
7
VA News. Tax Season Guidance for Veterans
8
Defense Finance and Accounting Service. December 2025 Retiree Newsletter – CRDP CRSC Open Season FAQs
9
Illinois Department of Revenue. Amending My Return (Form IL-1040)
10
Internal Revenue Service. Time You Can Claim a Credit or Refund