Does Illinois Tax Pension Income
No, Illinois does not tax pension income for most retirees. For tax year 2024 and beyond, qualifying pension and retirement account distributions are fully exempt from Illinois state income tax when you are age 65 or older or totally and permanently disabled. The most common failure mode: retirees under 65 assume their pension is automatically tax-free. It is not unless you have a documented disability.
What this means for you right now: If you are 65 or older, you can expect to owe zero Illinois income tax on your pension. That allows you to stop state withholding and budget your full pension amount without a state tax deduction. But if you are under 65 and not disabled, your pension is fully taxable in Illinois — plan for that liability and consider increasing your federal withholding to cover any shortfall (since federal tax still applies). The practical answer is clear: check your age on December 31, then act accordingly.
Who Qualifies for the Illinois Pension Tax Exclusion
Illinois allows a Retirement Income Subtraction that removes qualifying retirement income from state taxation. You qualify if you meet either condition as of December 31 of the tax year:
- Age 65 or older (no disability required)
- Totally and permanently disabled (any age, with documentation)
For 2024, there is no dollar cap on the exclusion for qualified taxpayers. It is a full exemption — every dollar of qualifying retirement income is removed from your Illinois taxable income.
How to Verify Your Eligibility Before Filing
1. Check your age: Look at your birth certificate or driver’s license. Your age on December 31 is what matters. Turn 65 on December 28? You qualify for the full year. Turn 65 on January 2? You do not qualify until next year.
2. Confirm disability documentation: If under 65, obtain a written determination from the SSA, VA, or a signed doctor’s statement confirming total and permanent disability. Keep it with your tax records; you do not attach it to your return, but you must produce it if audited.
3. Verify your pension is a qualified plan: Your plan administrator can confirm whether your pension is a qualified retirement plan (e.g., 401(k), 403(b), IRA, government pension). Non-qualified annuities and non-governmental deferred compensation do not qualify. Check your 1099-R: Box 7 distribution code typically indicates plan type. If uncertain, call your plan’s customer service line.
What Counts – and What Doesn’t
| Qualifying Retirement Income | Does NOT Qualify |
|---|---|
| Qualified employer pensions (private, public) | Social Security (already exempt in Illinois) |
| 401(k), 403(b), 457(b) plans | Non-qualified annuity payments |
| Traditional and Roth IRAs | Early withdrawal penalties (included in income) |
| Military pensions (all branches) | Non-qualified deferred compensation from non-governmental employers |
| Federal civilian pensions (CSRS, FERS, Foreign Service) | |
| Illinois state/municipal plans (IMRF, SURS, TRS) | |
| Survivor benefits (including military SBP) for eligible survivors |
The failure mode most people miss: early retirees (e.g., age 62) who hear “Illinois doesn’t tax retirement income” and assume they are covered. Because they are under 65 and not disabled, their pension is fully taxable. They may under-withhold and face a surprise tax bill when they file. The trade-off: taking early retirement before 65 means losing the state tax exemption. If that applies to you, plan for Illinois tax from day one.
Filing Steps – How to Claim the Exclusion
The Illinois subtraction uses the taxable amount from your federal return. Here is the filing sequence:
1. Start with your federal adjusted gross income from Form 1040.
2. On Illinois Form IL-1040, add back any retirement income your federal return excluded (Roth IRA distributions) only if not already in federal AGI.
3. Subtract qualifying retirement income using Schedule IL-IL, line 7a.
4. Transfer the total to Form IL-1040, line 9.
Example: You have $40,000 in taxable pension income on your federal return (from your 1099-R). You are 67. You subtract the full $40,000 on Schedule IL-IL. Your Illinois taxable income drops by that amount.
Verification step before filing: Line up your federal 1040, your 1099-R forms, and your Illinois Schedule IL-IL. Confirm that the taxable amount on your federal return matches the amount you subtract on line 7a. If there is a discrepancy — for instance, your 1099-R shows a non-qualified portion — contact your plan administrator to get a corrected form or breakdown.
Special Rules for Military and Federal Pension Recipients
- Military retirees: All military pension income is fully exempt for taxpayers who meet age or disability requirements. Same threshold as civilian pensions.
- Federal civilian retirees: Pensions from CSRS, FERS, Foreign Service, and other federal retirement systems qualify. Claim on Schedule IL-IL.
- Surviving spouses: Survivor benefits from qualified plans (including military SBP) qualify if you are 65+ or disabled.
How the Illinois Exclusion Interacts with Federal Tax
Illinois does not tax Social Security at all, so no subtraction is needed. But the exclusion only applies to qualified plans. Non-qualified income (e.g., from an annuity that was never part of a qualified retirement arrangement) is fully taxable at the state level.
Trade-off to watch: Roth IRA distributions are generally tax-free federally, but they may still be subject to Illinois tax if they are not part of a qualified rollover. Double-check with your tax preparer if you have a mix of qualified and non-qualified accounts.
Comparison to Neighboring States
| State | Pension Tax Treatment |
|---|---|
| <strong>Illinois</strong> | Full exemption for ages 65+ or disabled; no cap for 2024 |
| <strong>Indiana</strong> | Fully taxable at 3.05% flat rate; no retirement exclusion |
| <strong>Wisconsin</strong> | Fully taxable at graduated rates (3.50%–7.65%); no general exemption |
| <strong>Iowa</strong> | Partial exemption based on age and income; up to $12,000 per spouse (2024) |
| <strong>Missouri</strong> | Partial exemption for ages 62+; up to $85,000 (MFJ) if AGI under limits |
| <strong>Kentucky</strong> | Largely exempt (up to $31,110 per person for 2024) |
Illinois offers the most straightforward full exemption among its neighbors. Indiana and Wisconsin provide no equivalent protection.
Recent Changes and What to Watch For
The Retirement Income Fairness Act (Public Act 102-0200, signed 2021) phased in the full exemption:
- 2021–2023: Full exemption for ages 67+, partial for ages 65–66, reduced for younger.
- 2024 onward: Full exemption for ages 65+ and disabled, no dollar cap.
The phase-in is complete. If you turned 65 in 2024, you qualify for the full exemption.
What to watch for: Illinois has a budget deficit. Pension exemptions are occasionally revisited. No changes are pending as of early 2025, but verify each year when you file.
Three Practical Tips for Illinois Retirees
1. Pin your qualifying age to December 31
The age requirement uses your age on December 31 of the tax year. Turn 65 on December 28? You qualify for the full-year exclusion. Turn 65 on January 2? You wait until the next tax year.
- Action: Note your age on December 31 before filing. Even one day at 65 qualifies you for that full year.
- Mistake to avoid: Do not assume you qualify because you turn 65 during filing season. The date that controls is December 31 of the prior year.
2. Document disability before claiming the exclusion
If under 65, you must have a formal determination of total and permanent disability. The IRS standard applies (same criteria as the federal disability credit or exemption).
- Action: Keep a signed doctor’s statement or a determination from the SSA, VA, or your employer’s disability plan. You do not attach it to your IL-1040, but you must produce it on audit.
- Mistake to avoid: Do not claim the disability-based exclusion without a written, dated determination. A verbal agreement from your doctor is not sufficient.
3. Stop Illinois state withholding on your pension
Since Illinois exempts your pension but the IRS does not, your pension provider may default to withholding state tax. You can stop this.
- Action: Submit a new federal W-4P and request that your pension administrator stop Illinois state withholding. Use Form IL-W-4NR if you are a nonresident, or contact your plan’s customer service line directly.
- Mistake to avoid: Do not stop federal withholding because Illinois exempts the income. Federal tax still applies; only the state portion can be zeroed out.
When to Consult a Professional
The Illinois pension exclusion is straightforward for most retirees 65+ with a single pension. Consult a tax professional if any of these apply:
- You are under 65 and claiming the disability exclusion
- You receive multiple pensions, some qualified and some non-qualified
- You moved into or out of Illinois during the tax year
- You have a non-qualified annuity from a non-governmental employer
- You are a surviving spouse claiming the exclusion on survivor benefits
Disclaimer: This article provides general information about Illinois pension tax rules for the 2024 tax year. Tax laws change. Amounts, thresholds, and filing requirements are based on publicly available Illinois Department of Revenue guidance and may not reflect subsequent legislative changes. This is not tax or legal advice. Consult a qualified tax professional or the Illinois Department of Revenue for your specific situation.
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Michael Reynolds is a retirement benefits researcher and the lead author at Pension FAQ. With over 12 years of experience analyzing employer pension plans, state retirement systems, and Social Security policy, he specializes in translating complex pension rules into clear, actionable guidance for American workers and retirees.
Michael holds a Bachelor’s in Economics from the University of Michigan and has completed the Certified Retirement Counselor (CRC) program. His work has been cited by financial planners and HR professionals helping employees navigate their pension options.
At Pension FAQ, Michael leads a team covering employer plan access, state pension taxation, teacher and public employee retirement systems, professional sports pensions, and pension calculation rules. All content is rigorously reviewed against official plan documents and IRS guidelines.
Disclaimer: Pension FAQ content is for educational purposes only and does not constitute financial, tax, legal, or retirement benefits advice. Always consult your plan administrator or a qualified professional for decisions about your specific situation.