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- Social Security Retirement Benefits & Taxation by State
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The federal government taxes most sources of retirement income, including pension benefits, but the states take a variety of approaches to taxing retirement income. Some states tax any retirement income that the federal government taxes. Others exempt certain types of retirement income, such as Social Security, and tax the rest. Still others exempt all retirement income from state taxation.
Illinois is among the states that exempt all types of retirement income from state income taxes. For instance, the state does not tax distributions from defined-benefit pension plans, 401(k) accounts, IRAs, self-employed retirement savings, government employee pensions, military pensions, railroad retirement benefits, lump-sum distributions of retirement benefits, deferred compensation paid at retirement by a government employer, or the federally taxable portion of Social Security benefits. Illinois also exempts from state tax early distributions you take from an IRA or 401(k) plan.
Illinois bases its state income tax on your federal adjusted gross income, which includes federally taxable retirement income. When you fill out your state income tax return, you subtract distributions from pensions and other retirement plans from your federal AGI. Subtract from your AGI the pension benefits and 401(k) distributions reported on Form 1040 line 16b or Form 1040A line 12b. Subtract the Social Security and Railroad Retirement benefits reported on line 20b of Form 1040 or line 14b of Form 1040A. Subtract distributions from IRAs or self-employed retirement plans reported on line 15b of Form 1040 or line 11b of Form 1040A.
You subtract government pension and retirement plan distributions, government retirement disability payments, state or local government deferred compensation plans and group term life insurance premiums paid by a qualified retirement plan, but reported as wages. These items generally are included on line 7 of Forms 1040 and 1040A. You also subtract capital gains on employer securities distributed to you at retirement and reported on line 13 of Form 1040, and retirement payments to retired business partners reported on line 17 of Form 1040.
A couple of retirement-related income sources are taxable by Illinois. You can’t subtract unused sick time paid to you at retirement. If you receive deferred compensation and disability payments from a private-sector employer at retirement, that money is taxable.
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