A retiree drawing $70,000 a year entirely from Social Security, a pension, and a 401(k) owes Illinois exactly $0 in state income tax. That is not a loophole — it is Line 5 of Form IL-1040, where Illinois subtracts federally-taxed retirement income before applying its flat 4.95% rate. This calculator separates your income into the part Illinois exempts and the part it still taxes, and reminds you what the federal government takes from the same dollars.
What Illinois exempts, and what it doesn’t
| Income source | Illinois 4.95% tax? | Federal tax? |
|---|---|---|
| Social Security benefits | No | Up to 85% taxable, by income |
| Employer pension (qualified plan) | No | Yes, as ordinary income |
| 401(k) / 403(b) / 457 distributions | No | Yes, as ordinary income |
| Traditional IRA distributions | No | Yes, as ordinary income |
| Roth IRA / Roth 401(k) qualified distributions | No | No |
| Part-time wages, self-employment | Yes | Yes |
| Interest, dividends, capital gains | Yes | Yes (preferential rates for some) |
| Rental income | Yes | Yes |
The exemption covers income “received from qualified employee benefit plans” and Social Security to the extent included in federal adjusted gross income — the full list is in the Illinois Department of Revenue’s Publication 120, Retirement Income.
The state-side computation is short:
IL base income = federal AGI − retirement subtraction (Line 5)
IL net income = IL base income − personal exemption(s)
Illinois tax = IL net income × 4.95%Worked examples
All-retirement income. Social Security $30,000 + pension $25,000 + 401(k) withdrawals $15,000 = $70,000. Every dollar qualifies for the Line 5 subtraction, so Illinois base income is $0 and Illinois tax is $0. Federally, the pension and 401(k) money is ordinary income and a large slice of the Social Security is taxable under the combined-income test — the federal bill on this profile is typically a few thousand dollars.
Mixed income. Add $10,000 of part-time consulting to the retiree above. Illinois now taxes only that $10,000, minus the personal exemption (an inflation-indexed amount in the mid-$2,000s — check the current IL-1040 instructions for the exact figure). At 4.95%, the state bill is roughly $350-$370 on $80,000 of total income — an effective state rate under 0.5%.
Investment-heavy retiree. A retiree with $20,000 of Social Security and $60,000 of dividends and realized capital gains gets no Illinois break on the investment income: about $60,000 (less exemptions) is taxed at 4.95% ≈ $2,850. The retirement exemption follows the source of the income, not the age of the taxpayer.
The federal side: what the exemption doesn’t touch
Illinois’s generosity has no effect on your federal return:
- Traditional pension, 401(k), and IRA withdrawals are federally taxed as ordinary income at your marginal bracket.
- Social Security is taxed on a sliding scale: up to 50% of benefits are taxable once combined income (AGI + tax-exempt interest + half of benefits) passes $25,000 single / $32,000 joint, and up to 85% past $34,000 / $44,000 — thresholds that are not inflation-indexed. The rules are in IRS Publication 915.
- Required minimum distributions from traditional accounts (age 73 under current law) are federally taxable in full — and still Illinois-exempt.
A common planning consequence: Illinois retirees care much more about federal bracket management (Roth conversions, RMD timing, qualified charitable distributions) than about state tax at all.
Edge cases worth checking before you rely on the exemption
Early distributions. The Illinois subtraction applies to amounts reported as retirement income on the federal return, including most distributions taken before retirement age — but the federal 10% early withdrawal penalty still applies where the IRC imposes it. Nonqualified deferred compensation does not automatically qualify — only distributions from qualified plans listed in Pub 120. Out-of-state pensions are just as exempt as Illinois ones; the exemption is source-neutral. Part-year residents prorate: retirement income received while an Illinois resident is subtracted, but wages earned in Illinois remain taxable. And survivor benefits paid from a qualified plan retain the exemption in the survivor’s hands.
How unusual is Illinois?
Only a handful of states with an income tax exempt all three pillars — Social Security, private pensions, and defined-contribution withdrawals — the way Illinois does; Mississippi and Pennsylvania are the usual comparisons. Most states exempt Social Security but tax at least part of pension or 401(k) income. The trade-off is that Illinois property and sales taxes are high, so the full retirement picture depends on housing and spending, not just income. Periodic proposals to tax retirement income surface in Springfield during budget debates; none has passed, but the exemption is statutory, not constitutional, so it is worth re-checking Pub 120 each filing season.
Sources
- Illinois Department of Revenue — Publication 120: Retirement Income
- Form IL-1040 and instructions (current year)
- IRS Publication 915 — Social Security benefits taxation
This calculator estimates Illinois state income tax only and is not tax advice. Federal figures are simplified; confirm your situation with the IL-1040 instructions or a tax professional.