Illinois does not tax pension income. Distributions from qualified employer plans, traditional and Roth IRAs, government and military pensions, railroad retirement, and Social Security benefits are all subtracted from your state taxable income under 35 ILCS 5/203, which zeroes out the state’s 4.95% flat income tax on those funds.1Illinois General Assembly. 35 ILCS 5/203 – Base Income Defined2Illinois.gov. Income Tax Rates You will usually still need to file an Illinois return to claim the exemption, even when the tax owed is zero.
How the Subtraction Works
Illinois starts with your federal adjusted gross income and then allows modifications before applying its flat rate. The retirement income subtraction lets you remove the full amount of qualifying retirement income that was included in your federal return.1Illinois General Assembly. 35 ILCS 5/203 – Base Income Defined The 4.95% rate applies only to what remains. For someone whose income is entirely pensions and Social Security, that remainder is often zero.
One important limit: the subtraction covers only the federally taxed portion of your retirement income. If part of a distribution was already excluded from your federal AGI (because you had after-tax contributions, for example), you don’t subtract that part on your Illinois return, because it was never in your base income to begin with.3Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income?
What Retirement Income Qualifies
Illinois Publication 120 lists the eligible categories.4Illinois Department of Revenue. Pub-120, Retirement Income The subtraction is tied to specific parts of the federal tax code, so what matters is whether the plan itself qualifies under those provisions.
- Qualified employer plans, including 401(k) and 403(b) plans meeting IRC Sections 402 through 408.
- Traditional IRAs, SEP plans, and Keogh plans. Amounts rolled over from a traditional IRA into a Roth IRA also qualify.
- Federal, state, and local government pensions, including military retirement pay.
- Section 457 deferred compensation plans of state and local governments.
- The federally taxed portion of Social Security and railroad retirement benefits.1Illinois General Assembly. 35 ILCS 5/203 – Base Income Defined
- Retirement payments to retired partners that are excluded from self-employment income under IRC Section 1402.
- Capital gains from a lump-sum distribution of appreciated employer securities, to the extent the gains reflect net unrealized appreciation at the time of distribution.
- Interest realized on the redemption of U.S. retirement bonds.
Early Withdrawals
Early distributions from qualified plans and IRAs qualify for the Illinois subtraction.4Illinois Department of Revenue. Pub-120, Retirement Income If you pull money out before 59½ and owe the federal early withdrawal penalty, that’s a matter between you and the IRS. Illinois does not tax the distribution on top of it.
Pensions From Another State
The subtraction is not limited to pensions earned in Illinois. If you retired from a job in another state and moved here, your pension distributions still qualify as long as the plan meets the federal definition of a qualified retirement or government pension plan.3Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income?
What Doesn’t Qualify
Not everything you receive after you stop working is exempt. Because the subtraction keys off specific IRC sections, distributions from plans outside that framework remain taxable at 4.95%.
The most common example is a non-qualified deferred compensation plan. Executive deferred compensation governed by IRC Section 409A or similar non-qualified arrangements falls outside the Sections 402 through 408 framework, so those distributions are subject to Illinois income tax.1Illinois General Assembly. 35 ILCS 5/203 – Base Income Defined If you’re not sure about your plan, ask your former employer or plan administrator whether it is qualified under those IRC sections.
Other income that retirees often receive is fully taxable in Illinois: rental income, investment dividends, capital gains outside the employer-securities lump-sum rule, and any earnings from post-retirement consulting or part-time work. The subtraction applies to retirement plan distributions and Social Security, not to every dollar received by a retired person.
Do You Still Have to File?
If you were required to file a federal return, you must also file Illinois Form IL-1040, even when your entire income comes from pensions and Social Security and you owe nothing.5Illinois Department of Revenue. Filing Requirements The return is where you claim the subtraction. Without filing, the state has no record showing that your income qualifies.
If you weren’t required to file federally, you still need to file an IL-1040 if your Illinois base income after subtractions exceeds your personal exemption allowance. For tax year 2025 returns filed in 2026, the exemption is $2,925 per person, with an additional $1,000 for anyone 65 or older.6Illinois Department of Revenue. What Is the Illinois Personal Exemption Allowance? A married couple filing jointly, both 65 or older, has a combined exemption of $7,850. For most retirees whose income is all from qualifying sources, base income after subtractions is zero, well under the threshold.
How to Claim It on Your Return
The retirement income subtraction goes on Line 5 of Form IL-1040. Enter the total qualifying retirement and Social Security income that was included in your federal AGI.4Illinois Department of Revenue. Pub-120, Retirement Income Schedule M handles a different set of adjustments; the retirement subtraction itself belongs directly on the IL-1040, not on Schedule M.7Illinois Department of Revenue. 2025 IL-1040 Schedule M Instructions
To fill Line 5 accurately, pull your federal Form 1040 (pension and Social Security amounts appear on Lines 4b, 5b, and 6b) and any Forms 1099-R from plan administrators.8Illinois Department of Revenue. 2025 IL-1040 Instructions Box 7 of the 1099-R shows a distribution code identifying the type of payment. Code 7 is a normal distribution from a qualified plan for someone 59½ or older.9Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498 Codes 1, 2, and 3 can also generate subtraction-eligible income. What matters is whether the underlying plan qualifies, not the code on the form.
If your retirement income doesn’t show on the standard federal 1040 lines or on a W-2 or 1099, Publication 120 lists the additional attachments to include with your Illinois return.8Illinois Department of Revenue. 2025 IL-1040 Instructions
Deadlines and How to File
For tax year 2025, the IL-1040 and any tax owed are due April 15, 2026. The extended filing deadline is October 15, 2026.10Illinois Department of Revenue. What’s New for Illinois Income Taxes An extension gives you more time to file, not more time to pay. If you owe tax on non-retirement income, pay by April 15 to avoid penalties and interest.
You can file electronically through the MyTax Illinois portal at no cost, with or without an account, covering the current year and several prior years.11Illinois Department of Revenue. File Form IL-1040 on MyTax Illinois Electronic filing with direct deposit is the fastest route to any refund. Balances can be paid through the portal by ACH debit.
Paper returns go to the Illinois Department of Revenue at the address printed in the IL-1040 instructions, which differs depending on whether you’re enclosing a payment.8Illinois Department of Revenue. 2025 IL-1040 Instructions Paper processing takes much longer than electronic filing. Don’t mail a paper copy after filing electronically; duplicates delay processing.11Illinois Department of Revenue. File Form IL-1040 on MyTax Illinois You can check the status of a filed return through the state’s online lookup using your Social Security number and the expected refund amount.