Retirement income exempt
How Illinois taxes retirement income
Illinois has a flat income tax of 4.95%, but it is one of the most generous states in the country for retirees. On Form IL-1040, you subtract the federally taxed part of your Social Security, your pension from a qualified employer plan, and your 401(k), 403(b), 457(b) and IRA withdrawals. In practice, most retirees owe Illinois nothing on their retirement income.
The subtraction covers public pensions from Illinois systems such as TRS, SURS and IMRF, pensions from other states, federal pensions and company pensions alike, as long as the plan is a qualified employee benefit plan. Roth conversions from an IRA are covered too, which makes Illinois a good place to convert.
What Illinois does tax is income that is not from a qualified plan: wages from a part-time job, interest, dividends and capital gains, and payments from nonqualified deferred compensation. Property taxes in Illinois are among the highest in the country, which is the main cost retirees there feel.
Illinois public pensions
For the formula, payment dates and raises in your plan, see Illinois TRS.
Questions
Does Illinois tax my teacher pension?
No. Pensions from Illinois TRS, SURS, IMRF and other qualified plans are subtracted on the IL-1040, as are pensions from other states.
Does Illinois tax IRA withdrawals and Roth conversions?
No. The federally taxed part of IRA distributions, including amounts converted to a Roth IRA, can be subtracted.
Does Illinois tax Social Security?
No. The federally taxed part of Social Security is subtracted on Form IL-1040.