How Illinois income tax works: AGI, the exemption allowance, 4.95%

Illinois has one of the simplest income tax returns in the country, and the simplicity comes from a single design choice. Form IL-1040 starts from federal adjusted gross income, line 11 of Form 1040, not from federal taxable income. Everything the federal return does after AGI, the standard deduction, itemized deductions, the senior deduction, the new deductions for tips and overtime, the qualified business income deduction, is invisible to Illinois. The state then subtracts a few things, allows an exemption of $2,925 per person, and multiplies what is left by 4.95%. There are no brackets, no local income tax, and no itemizing.

That design has consequences most people never think about. A federal deduction taken below the AGI line is worth nothing in Illinois, which is why a tipped worker who owes no federal tax on $8,000 of tips still owes Illinois $396 on them. A federal adjustment taken above the line, an IRA contribution, a health savings account deposit, student loan interest, half of self-employment tax, flows through and cuts Illinois tax too. And because the starting number is AGI, a mistake on the federal return is taxed twice: once by the IRS and once more at 4.95%.

Who files

A full-year Illinois resident reports all income, wherever it was earned, and takes a credit on Schedule CR for tax paid to another state on income taxed by both. A part-year resident reports income earned while living in Illinois plus any Illinois-source income from the rest of the year, and a nonresident reports only Illinois-source income; both attach Schedule NR, which works out the Illinois share. Residents of Iowa, Kentucky, Michigan and Wisconsin who earn wages in Illinois are the exception: under the reciprocal agreements they pay only their home state on those wages, and they give the Illinois employer Form IL-W-5-NR to stop the withholding. Married couples use the same filing status they used federally. A return is required when Illinois base income exceeds the exemption allowance, and it is worth filing below that line to recover withholding or to claim the refundable earned income credit.

Where it starts: federal AGI

Line 1 of the IL-1040 is federal adjusted gross income, copied from Form 1040. That one fact explains most of what follows. Adjusted gross income is income after the “adjustments” on Schedule 1, but before the standard deduction and before every deduction that sits beneath it. So the federal standard deduction, $32,200 joint for 2026, never reaches Illinois. Neither does the extra standard deduction for age, the $6,000 senior deduction enacted for 2025 through 2028, the deductions for tips, overtime and car-loan interest, or the 20% qualified business income deduction. None of them require an Illinois add-back, because none of them were ever taken out. The Illinois return simply never sees them.

The flip side is that Illinois gives no deduction for mortgage interest, charitable gifts, medical bills or state and local taxes, whether or not the taxpayer itemized federally. The $40,400 SALT cap that occupies so much federal attention is irrelevant here. Illinois has no itemized deductions to cap.

The additions

Illinois adds a short list of items to AGI. For most households there is only one that comes up, and for many there is none.

Tax-exempt interest from other states. Line 2 picks up federally tax-exempt interest, which is mostly municipal bond interest. Interest on bonds issued by Illinois and its local governments is then taken back out on Schedule M, so the net effect is that Illinois taxes other states’ municipal bonds and exempts its own. A brokerage 1099 that lumps all municipal interest together has to be split.

Bonus depreciation. Illinois has not followed federal bonus depreciation for years, and in December 2025 the legislature extended that stance to the 100% bonus and the new section 168(n) expensing in the federal 2025 tax law. A sole proprietor, landlord or farmer who claimed bonus depreciation on a federal Schedule C, E or F adds it back on Form IL-4562 and Schedule M, then subtracts the regular depreciation Illinois would have allowed over the asset’s life. Over the life of the asset the totals match; the timing does not.

Smaller ones. Business expenses tied to income Illinois exempts, certain recaptured deductions, and the Illinois share of pass-through items reported on Schedule K-1-P or K-1-T. Schedule M lists all of them.

The subtractions

This is where the Illinois return gives money back, and the biggest line is the one that makes Illinois unusual among states that tax income.

Retirement income, line 5. Every dollar of Social Security, pension, IRA, 401(k) and similar retirement income that was taxed federally comes off here, with no age test, no income limit and no cap. A 45-year-old who cashes out a 401(k) gets the subtraction; so does a retired executive with a $300,000 pension. The subtraction is of the federally taxable amount, lines 4b, 5b and 6b of the 1040, not the gross. The rules, and what a Roth conversion does to them, are in Retirement income in Illinois.

529 contributions. Money put into one of the state’s own 529 plans is subtracted, up to $10,000 a year on a single return and $20,000 on a joint one. Out-of-state plans do not qualify. Because the federal return asks nothing about 529 deposits, this is the subtraction most often left off. See Bright Start and Bright Directions.

The exemption allowance

Illinois has no standard deduction. In its place is the exemption allowance on line 10: $2,925 for the taxpayer, $2,925 for a spouse, and $2,925 for each dependent claimed on Schedule IL-E/EITC, plus $1,000 more for each person 65 or older and $1,000 for each person who is legally blind. A married couple with two children claims $11,700; a retired couple both over 65 claims $7,850. The figure is indexed and rose from $2,850 for 2025.

The allowance has a cliff. If federal AGI is over $250,000 on a single, head-of-household or separate return, or over $500,000 on a joint return, the allowance is zero. There is no phase-out: one dollar over the line and the whole allowance disappears, which for a family of four is $11,700 of exemptions and $579 of tax. The same AGI lines switch off the property tax credit and the K-12 credit, so a household near $250,000 or $500,000 can lose three things at once.

The rate

AGI, plus additions, minus subtractions, is base income. Base income minus the exemption allowance is net income. Net income times 4.95% is the tax. That is the whole computation. Capital gains, dividends, interest, lottery winnings and unemployment are all taxed at the same rate as wages; there is no preferential rate for gains and no deduction for gambling losses, because there are no itemized deductions to put them on. Chicago and the state’s other home-rule cities cannot levy an income tax, so 4.95% is the only rate anyone pays.

The flat rate is in the state constitution, which is why it changes so rarely. It was 3% from 1990 to 2010, 5% from 2011 to 2014, 3.75% from 2015 to mid-2017 and 4.95% since July 2017.

The credits

Illinois credits come in two kinds. The nonrefundable ones on Schedule ICR reduce tax but cannot produce a refund by themselves. The earned income credit and the child tax credit attached to it are refundable: if they exceed the tax, the difference is paid out.

The property tax credit is small, 5% of a $6,000 bill is $300, but nearly every homeowner under the AGI line qualifies, and it needs the county property index number from the bill. The K-12 credit covers tuition, book fees and lab fees at any Illinois public or private school for a child under 21. The earned income credit is where Illinois is more generous than most states: it reaches people the federal credit leaves out, and the child tax credit rides on top of it. All three are covered in The property tax credit and Illinois EITC, the child tax credit and the K-12 credit.

Withholding and estimated payments

Illinois withholding on wages is figured from Form IL-W-4, where the employee claims allowances worth $2,925 each, and the employer withholds 4.95% of the rest. For a wage earner with no other income it comes out close. Withholding on pensions and IRA withdrawals is pointless in Illinois, since the income is not taxed, and payers generally do not withhold state tax from them.

Anyone who expects to owe more than $1,000 after withholding and credits must make estimated payments on Form IL-1040-ES, due April 15, June 15, September 15 and January 15. The safe harbor mirrors the federal one: pay at least 90% of this year’s tax or 100% of last year’s in four equal, timely installments and there is no penalty. Illinois does not have the federal 110% rule for higher earners. The usual people caught out are the self-employed, landlords, and anyone with a large capital gain, since none of that income is withheld on. The penalty is figured on Form IL-2210.

How to file

Most Illinois returns are filed electronically with the federal return, and the state refund arrives separately. The Department of Revenue’s free system, MyTax Illinois, files the IL-1040 directly, takes payments, and shows refund status; it does not require an account to file. The return is due April 15, 2027. Illinois grants an automatic six-month extension to October 15 with no form to file, but the extension is to file, not to pay: tax not paid by April 15 draws penalty and interest, and the payment goes in with Form IL-505-I. An amended return is Form IL-1040-X.

What trips people up

• Retirement income left in Illinois income because software carried the gross 1099-R amount instead of putting it on line 5.
• The federal senior, tips or overtime deduction expected to reduce Illinois tax. It never reaches the Illinois return.
• A Bright Start or Bright Directions contribution nobody mentioned, because the federal return did not ask.
• Out-of-state municipal bond interest left off line 2.
• The exemption allowance and credits taken on a return with AGI just over $250,000 or $500,000.
• Property tax paid on a second home or rental claimed for the 5% credit; only the principal residence counts.
• Gambling losses netted against winnings. Illinois taxes the gross.
• Bonus depreciation on a Schedule C or E carried into Illinois with no IL-4562.
• The extension treated as an extension to pay.