Does Illinois Tax Retirement Income? Exemptions and Senior Breaks

Illinois does not tax most retirement income. Social Security benefits, pension payments, 401(k) and 403(b) withdrawals, traditional and Roth IRA distributions, military retirement pay, and government deferred compensation are all subtracted from your taxable income before the state’s 4.95 percent flat tax is applied.¹² The federal government still taxes those distributions, but Illinois leaves them alone. A few categories of income and a couple of separate tax obligations do still reach retirees, so the full picture matters.

What Illinois Exempts

The Illinois Income Tax Act, at 35 ILCS 5/203, starts with your federal adjusted gross income and then subtracts specific categories of retirement income before the state rate is applied. The subtraction removes those amounts from the state’s reach entirely.²

Social Security and railroad retirement benefits, to the extent they are included in your federal return under Internal Revenue Code Sections 72(r) or 86.
Pensions and annuities, both public and private, whether paid as monthly checks or a lump sum from a qualified trust.
Distributions from 401(k) and 403(b) plans, whether periodic or taken after a rollover.
Distributions from traditional and Roth IRAs. The statute also subtracts amounts converted from a traditional IRA to a Roth, so a conversion that the IRS treats as taxable income produces no Illinois tax.
Eligible deferred compensation under Internal Revenue Code Section 457, including the State of Illinois Deferred Compensation Plan.³
Military retirement pay from any branch of the uniformed services, which falls under the subtraction for governmental retirement plans.

The subtraction applies to the federally taxed portion of these distributions, not the gross amount. For most retirees whose income comes primarily from these sources, the Illinois tax bill on retirement income is zero.

What Illinois Still Taxes

Not every dollar a retiree receives escapes the 4.95 percent rate. Three categories remain fully taxable:

Non-qualified deferred compensation. Plans that fall outside Internal Revenue Code Sections 401(a), 403(a), 403(b), 408, or 457 are not covered by the subtraction. These are typically executive supplemental arrangements, and Illinois taxes distributions from them as ordinary income.²
Wages and self-employment income. Part-time work or a small business in retirement is taxed at the standard rate.
Investment income. Interest, dividends, capital gains, and rental income are fully taxable. Retirees drawing significantly from brokerage accounts or rental property should plan for that state liability.

Does Age Matter for the Exemption?

No. The statute conditions the subtraction on the type of plan and the Internal Revenue Code section under which the distribution is reported, not on your age or years of service.² A 401(k) or IRA withdrawal taken before age 59½ is still reported under the same code sections and still qualifies for the Illinois subtraction. The federal 10 percent early withdrawal penalty still applies at the IRS level, but Illinois adds no penalty of its own and does not withdraw the subtraction based on age.⁴

How to Claim the Subtraction on Form IL-1040

Each plan or account that paid you during the year will send a Form 1099-R showing the gross distribution, the taxable portion, and any federal withholding. The taxable portion — the amount that made it into your federal adjusted gross income — is the figure Illinois uses.

Enter eligible retirement income directly on Line 5 of Form IL-1040. That line handles the retirement subtraction; Schedule M covers other additions and subtractions unrelated to retirement.⁵ The 2025 return is due April 15, 2026, with an automatic extension to October 15, 2026, though any tax owed is still due by April 15 to avoid interest.⁶

Moving Into or Out of Illinois

If you move during the year, you file as a part-year resident using Schedule NR with your IL-1040. Retirement income received while you were an Illinois resident goes on the Illinois return and is then subtracted; retirement income received after you leave is not reported to Illinois at all.⁷ Because Illinois subtracts qualified retirement income either way, the timing of the move rarely changes the tax on pensions or IRAs.

Once you become a nonresident, Illinois cannot tax your retirement income at all. Federal law at 4 U.S.C. § 114 prohibits any state from taxing the retirement income of a person who is not a resident of that state.⁸ The Schedule NR instructions reflect this by directing nonresidents to leave the IRA and pension lines blank in Column B.⁷

Property Tax Relief Programs for Seniors

Illinois retirement income is lightly taxed, but property taxes in the state are high. Four programs help offset that.

Senior Citizens Homestead Exemption

Homeowners who are 65 or older can reduce the equalized assessed value of their primary residence by up to $8,000 in Cook County and its collar counties, or up to $5,000 elsewhere in the state.⁹ There is no income limit. You apply through the county assessment office.

Senior Citizens Assessment Freeze

This freezes the equalized assessed value of your home at its level when you first qualified, blocking future assessment increases from raising your bill. Total household income must be $75,000 or less for the 2026 tax year, and you must reapply annually using Form PTAX-340.⁹

Senior Citizens Real Estate Tax Deferral

Homeowners at least 65 by June 1 with household income of $77,000 or less for 2026 can defer up to $7,500 per year in property taxes through this state-administered program.¹⁰ The state pays the taxes and places a lien on the property for the deferred amount plus interest. You need to have owned and lived in the home for at least three years, be current on all property taxes, and carry adequate insurance.

Property Tax Credit on the IL-1040

Any Illinois resident, regardless of age, can claim a credit on Form IL-1040 equal to 5 percent of the property tax paid on a primary residence. The credit is available to single filers with adjusted gross income up to $250,000 and joint filers up to $500,000.¹¹ Because retirement income is subtracted from Illinois base income, most retirees land well within these limits. The credit reduces the tax bill dollar-for-dollar rather than just lowering taxable income.

Illinois Estate Tax

A separate Illinois estate tax reaches retirees with significant assets even when the federal estate tax does not. Estates valued at more than $4 million, after deductions and adjusted taxable gifts, must file an Illinois estate tax return.¹² The federal exemption is above $13 million for 2026, so an estate that owes nothing federally can still face an Illinois bill.

Rates are graduated from 0.8 percent to 16 percent on amounts above the exemption. An all-Illinois estate valued at $5 million would owe roughly $285,714. When only part of the estate sits in Illinois, the tax is prorated. Illinois does not impose a separate inheritance tax, so beneficiaries are not individually taxed on what they receive.¹²

1
Illinois Department of Revenue. Income Tax Rates
2
Illinois General Assembly. Illinois Compiled Statutes 35 ILCS 5/203
3
State of Illinois. State of Illinois Deferred Compensation Plan
4
Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income?
5
Illinois Department of Revenue. 2025 IL-1040 Schedule M Instructions
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Illinois Department of Revenue. FY 2026-15 – What’s New for Illinois Income Taxes
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Illinois Department of Revenue. IL-1040 Schedule NR Instructions
8
Office of the Law Revision Counsel. 4 U.S. Code 114 – Limitation on State Income Taxation of Certain Pension Income
9
Illinois Department of Revenue. Property Tax – Exemption Information (PIO-74)
10
Illinois Department of Revenue. Senior Citizens Real Estate Tax Deferral Program (PIO-64)
11
Illinois Department of Revenue. Pub-108, Illinois Property Tax Credit
12
Illinois Attorney General. Important Notice Regarding Illinois Estate Tax and Fact Sheet