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, including Illinois.
Illinois is one of the states that does not tax retirement income.
Does Illinois Tax Retirement Income?
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. It bases its state income tax on your federal adjusted gross income, which includes federally taxable retirement income.
Deducting Pensions and Retirement Plans
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.
Illinois Pension Tax Exceptions
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.
Pensions Under 2019 Taxes
Although Illinois doesn't tax pensions, the federal government does, so it's important to pay close attention to the changes in tax laws that may affect your amount due. The updated tax tables could mean that the net amount you receive in your pension checks changes moving forward. You can change your withholding amount, but it's important to check with a financial adviser or tax preparer to make sure you're having enough taken out to avoid penalties at tax time. It's also important to watch Illinois pension news today and on an ongoing basis to learn of any changes to this.
Visit IRS.gov/forms and search for Publication 575 (Pension and Annuity Income) to find a detailed listing of different types of pensions and annuity income and their tax implications.
Filing Your 2018 Taxes
If you earned a pension in 2018, you'll need to fill out Form IL-1040 and subtract your pension-based income from your total earned income. This will keep your pension out of your total taxable income while still ensuring you're compliant with tax laws.
The IRS recommends that all retirees with pension income perform a "paycheck checkup" because of 2018 changes to tax law. Visit IRS.gov and type in "tax withholding calculator" to access the IRS online tool that helps you calculate your withholding amount.
- Illinois Department of Revenue: Social Security Benefits and Certain Retirement Plans
- IRS: Early Release Copies of the 2018 Percentage Method Tables for Income Tax Withholding
- Department of Retirement Systems: Retirees, new IRS tax withholding tables may affect your pension amount
- IRS Publication 575
- IRS: Retirees with Pension Income Should do a Paycheck Checkup ASAP
- IRS: IRS Withholding Calculator
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