Does Illinois Tax Social Security and Retirement Income?

Illinois does not tax Social Security

Illinois starts its return with federal adjusted gross income and then removes Social Security. Whatever portion of benefits was taxable on the federal return (U.S. Form 1040 or 1040-SR, line 6b) is subtracted on Form IL-1040, Line 5. There is no income limit and no age requirement. Railroad retirement benefits are subtracted on the same line. (Illinois Department of Revenue, Publication 120, Retirement Income)

A retired Illinois resident who files a federal return must still file Form IL-1040, even when all income is subtracted, and attach the federal Form 1040 or 1040-SR to support the Line 5 figure. (Illinois Department of Revenue, Form IL-1040 Instructions (2025))

The federal government is a separate matter. Up to 85% of a benefit can be taxed on a federal return once other income passes fixed thresholds, wherever you live. Our taxable Social Security calculator shows how much of yours is counted.

Private, government and military pensions are all exempt

Illinois subtracts the federally taxed portion of payments from a qualified employee benefit plan, which Publication 120 defines by reference to Internal Revenue Code sections 402 through 408. That covers ordinary private-employer pensions as well as 401(k) plans, reported on line 5b of the federal return. (Illinois Department of Revenue, Publication 120, Retirement Income)

Government retirement and government disability plans are subtracted in full, and Publication 120 names military plans specifically. State and local government deferred compensation paid under section 457 qualifies too. The publication draws no distinction between Illinois plans and those of the federal government or other states. (Illinois Department of Revenue, Publication 120, Retirement Income)

The exemption stops at the edge of qualified and government plans. Payments from a deferred compensation or disability plan that is neither qualified nor governmental cannot be subtracted, so non-qualified deferred compensation from a private employer is taxed at 4.95%. Ordinary income from a lump-sum distribution is also taxable if the taxpayer elects the special 10-year averaging method on federal Form 4972. (Illinois Department of Revenue, Publication 120, Retirement Income)

IRA and 401(k) withdrawals and Roth conversions are not taxed

Distributions from traditional IRAs and from SEP and other self-employed retirement plans, reported on line 4b of the federal return, are subtracted on Line 5 along with 401(k) distributions. The subtraction covers the whole federally taxed amount. Publication 120 states that early distributions from qualified plans and IRAs may be included, so the treatment does not depend on reaching 59½ or any other age. (Illinois Department of Revenue, Publication 120, Retirement Income)

Roth conversions get the same treatment. Publication 120 lists IRA income “including amounts rolled over to a Roth IRA” among the subtractions. A $100,000 conversion therefore adds $100,000 to federal AGI on Line 1 and $100,000 to the subtraction on Line 5, leaving Illinois base income unchanged. (Illinois Department of Revenue, Publication 120, Retirement Income)

To size a conversion against federal brackets and Medicare surcharges, see the Roth conversion calculator; for required withdrawals, the RMD calculator.

Interest, dividends and capital gains are taxed at 4.95%

Investment income is what Illinois actually taxes in retirement. Interest, dividends and capital gains are part of federal AGI and are not covered by the Line 5 subtraction. The return applies one rate to net income, so a long-term capital gain is taxed at the same 4.95% as bank interest. A $200,000 gain on the sale of a stock position costs $9,900 of Illinois tax. (Illinois Department of Revenue, Form IL-1040 Instructions (2025))

Interest on U.S. Treasury bills, notes, bonds and savings bonds is exempt and is subtracted from base income. Distributions from a mutual fund qualify to the extent they come from U.S. government obligations. (Illinois Department of Revenue, Publication 101, Income Exempt from Tax)

Federally tax-exempt municipal bond interest is added back on Form IL-1040, Line 2, and that includes interest on most bonds issued by Illinois and its own cities and districts. Only bonds issued under specific statutes, such as those of the Illinois Housing Development Authority, are exempt, and even then not when they are held through a mutual fund. (Illinois Department of Revenue, Publication 101, Income Exempt from Tax)

Illinois taxes net income at a flat 4.95%, the same for every filing status. There is no standard deduction and no itemized deductions. The return runs from federal AGI (Line 1), through additions and subtractions to base income (Line 9), less the exemption allowance (Line 10) to net income (Line 11), which is multiplied by 4.95% on Line 12. The 2025 form used an exemption allowance of $2,850 per person. (Illinois Department of Revenue, Form IL-1040 Instructions (2025))

The exemption allowance is indexed to inflation. The Department of Revenue has announced that the amount for tax year 2026 is $2,925 per person, which applies to the 2026 Form IL-1040, to estimated payments and to withholding. A married couple filing jointly claims $5,850. (Illinois Department of Revenue, Informational Bulletin FY 2026-15, What’s New for Illinois Income Taxes)

A taxpayer who is 65 or older by the end of the tax year gets an additional $1,000 exemption, and so does a spouse on a joint return. Legal blindness adds another $1,000 each. For 2026 a single filer aged 65 or older subtracts $3,925 and a couple who are both 65 or older subtract $7,850. (35 ILCS 5/204, Illinois Income Tax Act, standard exemption)

The exemption has a ceiling that the table above cannot show. If federal AGI is greater than $250,000, or $500,000 on a joint federal return, the entire exemption allowance is lost, including the age-65 amounts. It is a cliff, not a phase-out, and it is measured on federal AGI before the retirement subtraction. (Illinois Department of Revenue, Form IL-1040 Instructions (2025))

The main break is the Line 5 subtraction itself. It has no age test and no dollar limit. In our three example households it removes $65,500, $116,750 and $209,500 of income, leaving only interest, dividends and capital gains in the Illinois base. (Illinois Department of Revenue, Publication 120, Retirement Income)

The additional $1,000 exemption at 65 is worth $49.50 of tax per person at the 4.95% rate. It applies automatically by checking the box on Line 10b and is available at any income below the $250,000 and $500,000 federal AGI ceilings. (Illinois Department of Revenue, Form IL-1040 Instructions (2025))

The same three households appear on every state page, so the figures can be compared across states. Each is a full-year resident taking the standard deduction, with no dependents. The figures are state income tax only: any county, city or school district income tax is described on this page but not added in. Pension income is from a private employer, and IRA figures are taxable withdrawals from traditional accounts. The state tax is our calculation from Illinois's published 2026 rules; it is an illustration, not a return.

These households also owe federal income tax, which does not change with the state. The tax bracket calculator and the guide to taxes in retirement cover that side.

Property tax is the largest state and local tax most Illinois retirees pay. As a comparative figure, the Tax Foundation’s 2026 report, using 2024 Census data, puts property taxes at 1.88% of owner-occupied home value, second highest among the states and level with New Jersey to two decimal places. That is about $7,520 a year on a $400,000 home. The report’s county figures show 1.73% in Cook County and 2.26% in Lake County. (Tax Foundation, Property Taxes by State and County, 2026 (comparative figures from Census ACS data))

Relief comes as exemptions that reduce a home’s equalized assessed value (EAV), the figure the local tax rate is applied to, so the dollar saving depends on the rate where the home is. The Property Tax Extension Limitation Law, often called a tax cap, limits the growth of taxing districts’ total levies; it does not cap an individual bill or assessment. (Illinois Department of Revenue: Property Tax Relief, Homestead Exemptions (PIO-74))

The assessment freeze for owners 65 or older holds EAV at its base-year level, and the household income limit rises from $65,000 to $75,000 for taxable year 2026, $77,000 for 2027 and $79,000 for 2028 and later. Household income is the combined income of everyone living in the home, measured for the calendar year before the taxable year. In Cook County the exemption is never less than $2,000 of EAV. (35 ILCS 200/15-172, Low-Income Senior Citizens Assessment Freeze Homestead Exemption)

The income tax return carries its own property tax credit: 5% of the Illinois property tax paid on a principal residence, claimed on Schedule ICR. The credit can only reduce income tax to zero. It is not refunded or carried forward, so a retiree whose income is entirely exempt gets nothing from it, and it is denied when federal AGI exceeds $250,000, or $500,000 on a joint return. The example households on this page leave the credit out because it depends on the home. (Illinois Department of Revenue, Publication 108, Illinois Property Tax Credit)

The statewide sales tax rate on general merchandise is 6.25%, and counties, municipalities and transit districts add their own rates. In the Chicago region the Northern Illinois Transit Authority tax, formerly the RTA tax, rose by 0.25 percentage point on August 1, 2026, to 1.25% in Cook County and 1.00% in DuPage, Kane, Lake, McHenry and Will counties. (Illinois Department of Revenue, Informational Bulletin FY 2026-34, Northern Illinois Transit Authority Tax Rate Change, Effective August 1, 2026)

As a comparative figure, the Tax Foundation puts the average combined state and local rate at 8.96% as of January 1, 2026, eighth highest in the country. (Tax Foundation, State and Local Sales Tax Rates, 2026 (comparative figures))

The state’s 1% tax on groceries ended on January 1, 2026. The same law lets municipalities and counties impose a local grocery tax of exactly 1% by ordinance, so whether groceries are taxed now depends on the town. Candy, soft drinks, alcohol and prepared food are not groceries and are taxed at the full rate. Qualifying drugs and medical appliances are still taxed by the state at 1%. (Illinois Department of Revenue, Informational Bulletin FY 2026-03, Illinois Grocery Tax Changes Effective January 1, 2026)

Illinois has its own estate tax with an exclusion amount of $4,000,000, which is lower than the federal exemption. An Illinois Form 700 must be filed whenever the gross estate, after adding back adjusted taxable gifts, exceeds $4,000,000, whether or not a federal return is required. The tax is due nine months after death. (Illinois Attorney General, Important Notice Regarding Illinois Estate Tax and Fact Sheet (decedents dying in 2023 or later))

The Attorney General describes the exclusion as a taxable threshold and not a credit against tax, and the difference shows in the office’s own examples. A $4,000,000 estate owes nothing. A $5,000,000 estate held entirely in Illinois owes $285,714, which is 28.6% of the $1,000,000 above the threshold and 5.7% of the whole estate. (Illinois Attorney General, Important Notice Regarding Illinois Estate Tax and Fact Sheet (decedents dying in 2023 or later))

The statute defines the tax as the federal credit for state death taxes as it stood on December 31, 2001, computed with an exclusion of only $4,000,000 for deaths on or after January 1, 2013. The figure is fixed in the law, with no inflation adjustment. (35 ILCS 405/2, Illinois Estate and Generation-Skipping Transfer Tax Act, definitions)

Portability does not apply: a surviving spouse cannot use the exclusion the first spouse left unused. Illinois does allow its own QTIP election, separate from any federal election, which defers tax on property left in a qualifying trust for the spouse. In the Attorney General’s example a $13,610,000 estate with a $9,610,000 Illinois QTIP election owes no Illinois tax at the first death. (Illinois Attorney General, Important Notice Regarding Illinois Estate Tax and Fact Sheet (decedents dying in 2023 or later))

The tax is first computed as if every asset were in Illinois and then multiplied by the share of assets located there, for residents and non-residents alike. A $5,000,000 estate held half in Illinois and half in Florida owes Illinois $142,857. (Illinois Attorney General, Important Notice Regarding Illinois Estate Tax and Fact Sheet (decedents dying in 2023 or later))

Illinois has no inheritance tax. The Attorney General’s office notes that an inheritance tax release may be needed only where the decedent died before January 1, 1983. (Illinois Attorney General: Filing Estate Taxes in Illinois)

The federal estate tax applies in every state. The estate tax calculator estimates both the federal tax and any state tax.

The inflation indexing of the personal exemption allowance has an end date. The statute sets the amount at $2,050 plus a cost-of-living adjustment only for tax years ending on or before December 31, 2028. Unless the General Assembly extends that provision, the law provides a basic amount of $1,000 for later years. (35 ILCS 5/204, Illinois Income Tax Act, standard exemption)

The state’s 1% sales tax on groceries was eliminated on January 1, 2026, with municipalities and counties allowed to adopt a 1% local replacement. (Illinois Department of Revenue, Informational Bulletin FY 2026-03, Illinois Grocery Tax Changes Effective January 1, 2026)

Public Act 104-452, effective December 12, 2025, widened the senior tax deferral program. Its maximum household income went from $65,000 for tax years 2022 through 2024 to $75,000 for 2025 and $77,000 for 2026, and it reaches $79,000 for 2027 and later. The same act raised the assessment freeze limit. (320 ILCS 30/2, Senior Citizens Real Estate Tax Deferral Act, definitions (maximum household income))

For tax years ending on or after December 31, 2026, Illinois no longer follows the federal exclusion for gain on qualified small business stock under Internal Revenue Code section 1202. Individuals add the federally excluded gain back to Illinois base income, where it is taxed at 4.95%. (Illinois Department of Revenue, Informational Bulletin FY 2027-01, 2026 Income Tax Changes That May Impact Current Tax Year Liabilities)

The exemption allowance for tax year 2026 is $2,925. The 2026 Form IL-1040 had not been published when this page was reviewed, so line numbers here follow the 2025 form. (Illinois Department of Revenue, Informational Bulletin FY 2026-15, What’s New for Illinois Income Taxes)

A person is an Illinois resident for a tax year if domiciled in Illinois, meaning it is the place they live and intend to return to after temporary absences. The Department lists out-of-state residence during the winter or summer as a temporary absence, so a retiree who winters in Florida but keeps Illinois as the permanent home remains a full-year resident. (Illinois Department of Revenue, Form IL-1040 Instructions (2025))

The statutory definition turns on purpose and domicile, not on a count of days. A resident is someone in Illinois for other than a temporary or transitory purpose, or domiciled there and away only temporarily. A person becomes a part-year resident by establishing or giving up residence during the year. (35 ILCS 5/1501, Illinois Income Tax Act, definitions (resident and part-year resident))

Part-year residents and non-residents file Form IL-1040 with Schedule NR. A part-year resident is taxed on all income received while a resident and on Illinois-source income received while a non-resident. For a non-resident, Schedule NR treats interest, dividends, IRA distributions, pensions and Social Security as not taxed by Illinois. (Illinois Department of Revenue, Schedule NR IL-1040 Instructions (2025))

Federal law (4 U.S.C. 114) bars any state from taxing the retirement income of a person who is not a resident or domiciliary of that state. It matters most for people moving in: a pension or IRA built during a career in a state that taxes retirement income is taxed only by the state of residence when it is paid, and for an Illinois resident that means not at all. (4 U.S.C. 114, Limitation on State income taxation of certain pension income)