When you withdraw money from your individual retirement account or other qualified tax-deferred retirement account, you will owe federal income taxes on the amount you withdrew. Depending on your state, you may also owe state income taxes on your IRA distributions. States may tax all or part of IRA distributions or exempt IRA withdrawals from state taxation
No Illinois Tax
As of 2011, Illinois does not tax income from retirement plans. It doesn’t tax withdrawals from IRAs. The state doesn’t tax rollovers from a traditional IRA to a Roth IRA. It also doesn’t tax income from retirement annuities, 401(k) plans, 403(b) plans, 457 programs, retirement plans for self-employed people, government/military Thrift Savings Plans, railroad retirement benefits, Social Security, federal retirement savings bonds or pensions.
Illinois bases its 5 percent state income tax on your federal adjusted gross income, plus or minus state-specific income adjustments. Illinois treats retirement income as a subtraction from federal adjusted gross income. Illinois also counts early distributions from an IRA, 401(k) or other qualified retirement plan as tax-exempt retirement income that you subtract from federal adjusted gross income. Similarly, if you start taking Social Security retirement benefits early, before you reach full retirement age, those benefits are not taxed by Illinois.
Taking the Exemption
To get the retirement-income tax exemption, add up the retirement-plan income you reported on lines 7, 8a, 15b, 16b or 20b of the federal Form 1040 and enter the total on Line 5 of your Illinois tax return. Subtract that total from your federal adjusted gross income. If you file the simplified Form 1040A, you add the retirement plan income reported on Lines 7, 8a, 11b, 12b, or 14b of the 1040A, enter the total on Line 5 of the Illinois tax return and subtract that amount from your federal adjusted gross income. You also must attach copies of the front page of your federal tax return and your Forms 1099-R and/or SSA-1099.
Illinois does tax certain payments that may be included with your retirement benefits. If your retirement payments include any deferred compensation or pay for unused sick days or vacation time, the portion attributable to the deferred compensation or accrued sick or vacation pay is taxable.
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