Illinois · retirees
Retirement income in Illinois: the Line 5 subtraction and Roth conversions
Illinois does not tax Social Security, pensions, IRAs, 401(k)s or any other retirement plan income, at any age and in any amount. How the Line 5 subtraction works, what counts and what does not, why a Roth conversion is free of state tax here, what the state offers seniors beyond the income tax, and the handful of mistakes that put retirement income back into Illinois income.
By Charles Trautman, EA
Need to Know Tax · written from Illinois Department of Revenue sources, October 29, 2026; updated November 12, 2026 after the election · not yet reviewed by an Illinois practitioner
Illinois is one of a small number of states with an income tax that taxes none of a retiree’s retirement income. Social Security, pensions, traditional IRA withdrawals, 401(k) and 403(b) distributions, government and military retirement pay, railroad retirement: all of it comes off on line 5 of Form IL-1040, in full. There is no age test, no income limit and no cap. A 40-year-old who takes a hardship withdrawal gets the subtraction; so does a retired surgeon with a $400,000 pension. The only requirement is that the income came from a qualified retirement plan, an IRA or Social Security, and was taxed federally. What Illinois does tax is everything else a retiree earns: interest, dividends, capital gains, rent, part-time wages, and, for the person who is still working, their salary.
The subtraction is of the federally taxable amount, not the gross. Line 5 takes the figures from lines 4b, 5b and 6b of the federal return, the taxable portions of IRA distributions, pensions and Social Security, plus a few retirement items that appear elsewhere on the 1040. If only $20,000 of a $30,000 Social Security benefit is taxed federally, only $20,000 is in AGI to begin with, and $20,000 is what comes off. The result is the same either way: Illinois tax on it is zero.
What goes on line 5
| Income | Federal line |
|---|---|
| Social Security and railroad retirement benefits | 1040 line 6b |
| Traditional IRA, SEP and SIMPLE IRA distributions, including amounts converted to a Roth IRA | 1040 line 4b |
| Pensions, annuities from employer plans, 401(k), 403(b), profit-sharing and other qualified plans | 1040 line 5b |
| Government and military retirement and disability plans paid as wages | 1040 line 1z |
| State and local government section 457 deferred compensation | 1040 line 1z or 5b |
| Net unrealized appreciation on employer stock from a lump-sum distribution | 1040 line 7a |
| Group term life premiums paid by a qualified retirement plan | 1040 line 1z |
| Interest on redeemed U.S. retirement bonds | 1040 line 2b |
Early distributions qualify. A 401(k) cashed out at 35 owes the federal 10% penalty and federal income tax, but the distribution is still from a qualified plan, so it comes off the Illinois return. Illinois has no penalty of its own.
Two retirement items go elsewhere. Retirement payments to a retired partner from a partnership, reported on federal Schedule 1 or on Schedule K-1-P, are subtracted on Schedule M rather than line 5. And a beneficiary’s share of retirement income that passes through an estate or trust on Schedule K-1-T is handled on Schedule M as well.
What does not qualify
The subtraction is for income from qualified plans and IRAs. Income that merely arrives in retirement does not count:
- Third-party sick pay and disability payments from a plan that is not a government plan.
- Nonqualified deferred compensation from a private employer, the kind paid to executives outside the 401(k).
- A commercial annuity bought with after-tax money outside a retirement plan; the taxable part of each payment is ordinary Illinois income.
- Lump-sum distributions on which the taxpayer elected ten-year averaging on federal Form 4972.
- Interest, dividends, capital gains and rent earned in a taxable brokerage account, however the account is labeled.
- Wages, including wages paid to a retiree who went back to work.
Qualified Roth withdrawals are not on the list because they are not taxed federally and so are never in AGI. There is nothing to subtract.
Roth conversions: free of state tax
A Roth conversion is a distribution from a traditional IRA that is immediately deposited in a Roth. Federally it is taxable in the year of the conversion. In Illinois, the converted amount is reported on federal line 4b, and line 4b is one of the sources that qualifies for the line 5 subtraction. The Department of Revenue’s own list says so in terms: IRA distributions “including amounts rolled over to a Roth IRA.” So the conversion goes into Illinois AGI on line 1 and comes back out on line 5, and the Illinois tax on it is zero.
This changes the arithmetic of a conversion for an Illinois resident. In most states a conversion costs federal tax plus 4% to 10% of state tax; in Illinois it costs federal tax only. Someone converting $100,000 in the 22% federal bracket pays about $22,000 and nothing to Illinois. Later, the Roth withdrawals are tax-free everywhere. For anyone weighing a conversion before a move to a state that does tax retirement income, the Illinois years are the time to do it.
The federal side still has teeth. A conversion raises AGI, which can make more Social Security taxable, raise Medicare premiums two years later through IRMAA, and push the taxpayer over the $250,000 or $500,000 Illinois AGI cliff that switches off the exemption allowance and the property tax credit. That last point is the one Illinois-specific cost: the conversion itself is not taxed, but it counts toward the cliff.
Worked example: a retired couple with a Roth conversion
Both 68. Social Security of $36,000 (taxable amount $30,600 after the federal formula), a pension of $24,000, a $50,000 Roth conversion, and $8,000 of interest and dividends from a brokerage account. Property tax of $5,400 on the house.
| Federal AGI (IL-1040 line 1) | $112,600 |
| Line 5: taxable Social Security | −$30,600 |
| Line 5: pension | −$24,000 |
| Line 5: Roth conversion | −$50,000 |
| Base income | $8,000 |
| Exemption allowance: 2 × $2,925 plus 2 × $1,000 for age | −$7,850 |
| Net income | $150 |
| Tax at 4.95% | $7 |
| Property tax credit, 5% of $5,400 (limited to the tax) | −$7 |
| Illinois tax | $0 |
On $112,600 of federal AGI the couple owes Illinois nothing, and the $50,000 conversion changed nothing. The federal tax on the same return, after the standard deduction with the age additions and the $6,000 senior deductions, is roughly $7,300 (verify). Note that the $263 of unused property tax credit is lost; the credit is nonrefundable.
The federal senior deduction, and why it does not help here
The $6,000 federal deduction for people 65 and older, in effect for 2025 through 2028, comes off after adjusted gross income, alongside the standard deduction. Illinois starts from AGI. The deduction therefore never reaches the Illinois return, and no add-back is needed because nothing was taken out. The same is true of the extra standard deduction for age. What Illinois gives seniors instead is the $1,000 additional exemption on line 10b for each person 65 or older, worth about $50 of tax, and the exclusion of retirement income itself, which for most retirees is worth far more than any deduction.
Relief outside the income tax
Because the income tax already leaves retirement income alone, the state’s remaining help for seniors is on the property tax bill, and none of it is claimed on the IL-1040.
| Program | What it does | Who |
|---|---|---|
| Senior citizens homestead exemption | Removes $8,000 of equalized assessed value in Cook County, $5,000 elsewhere, on top of the general homestead exemption of $10,000 in Cook, $8,000 in the counties bordering Cook and $6,000 elsewhere | 65 or older, owner-occupant |
| Senior citizens assessment freeze | Freezes the equalized assessed value at the base year; the tax rate can still rise | 65 or older, household income $75,000 or less for the 2026 assessment year, the bill paid in 2027 (it was $65,000 through 2025; $77,000 for 2027 and $79,000 from 2028, Public Act 104-0452); annual application |
| Senior citizens real estate tax deferral | The state pays up to $7,500 of property tax a year as a loan at 3% simple interest, repaid from the estate or on sale | 65 or older, household income $65,000 or less (verify), through the county treasurer |
| Property tax credit on the IL-1040 | 5% of property tax paid on the principal residence, nonrefundable | Any age, AGI under $250,000 single / $500,000 joint |
The homestead exemptions and the freeze are applied for at the county assessor or, in Cook County, the Cook County Assessor’s office, and the deferral at the county treasurer. The freeze uses a household income test of $75,000 for the 2026 assessment year, up from $65,000, and the deferral has its own income limit; both count Social Security and retirement income in full, even though the income tax ignores them. The property tax credit on the return, the one piece on the IL-1040, is covered in The property tax credit, and the relief that is not on the return.
Moving in, moving out
Federal law since 1996 bars any state from taxing retirement income of someone who no longer lives there, so a pension earned in New York and paid to a new Illinois resident is Illinois’s to tax, and Illinois chooses not to. Retirees who move in from a state that taxes retirement income stop paying state tax on it the day they become Illinois residents. The reverse is also true: an Illinois resident who retires to a state with an income tax starts paying that state’s tax on the same pension, and the Illinois exemption does not travel.
The move-year return splits the year on Schedule NR. Pension and IRA income is allocated by residence on the date each payment was received, so a January-to-June Illinois resident reports the first half of the year’s 1099-R to Illinois, where it is then subtracted, and the second half to the new state. The question of which state has the right to tax a retiree in the first place is in Moving to Illinois.
Withholding
Since none of this income is taxed, Illinois withholding on a pension or IRA distribution serves no purpose, and most payers do not withhold Illinois tax from retirement payments at all. A retiree whose only other income is small interest and dividends usually owes nothing and has nothing withheld. The ones who need to watch estimated payments are retirees with large taxable brokerage accounts, rental income or capital gains from a sale, since that income is taxed at 4.95% and nobody withholds on it. The threshold for estimated payments is $1,000 of expected tax after withholding and credits.
Behind the scenes
The retirement exemption was written into the Illinois Income Tax Act when the tax was created in 1969, at a time when the state had no income tax at all and the political price of adopting one was keeping pensions out of it. It has survived every budget crisis since. Proposals to tax retirement income above some threshold surfaced in the 2010s as the state’s pension debt grew, and the Civic Federation and others have estimated the exemption costs the state more than $2 billion a year (verify). None of the proposals got a sponsor willing to carry them.
The 2020 graduated-tax amendment did not touch the exemption, but its opponents argued that once rates could vary, taxing retirement income would follow, and the argument worked: the amendment failed. The practical effect is that the exemption is now politically harder to touch than it was before the vote, and no bill filed in the 2025–2026 session proposes to change it.
What to bring
- Every 1099-R and the SSA-1099 or RRB-1099 for each spouse, with the federal taxable amounts
- Form 1099-R for any Roth conversion, and the Form 5498 showing the Roth deposit
- Dates of birth for both spouses; age 65 adds $1,000 to the exemption allowance
- For a nonqualified annuity or deferred compensation: the contract or plan statement, so it can be kept off line 5
- Brokerage 1099s for interest, dividends and gains, which Illinois does tax
- The property tax bill for your residence, and any senior exemption or freeze paperwork from the county
- If you moved during the year: the date, and the 1099-R payments by period
Questions people ask
Does Illinois tax Social Security?
No. Whatever portion is taxed federally is subtracted in full on line 5. If none of it is taxed federally, there is nothing to subtract and nothing to tax.
Is there an age or income limit on the retirement subtraction?
No. The subtraction applies at any age and any income. An early 401(k) withdrawal at 30 and a seven-figure pension are both exempt.
Does Illinois tax a Roth conversion?
No. The converted amount is an IRA distribution reported on federal line 4b, which qualifies for the line 5 subtraction. The conversion still raises federal AGI, which can affect Medicare premiums and, above $250,000 single or $500,000 joint, the Illinois exemption allowance and credits.
I inherited my mother’s IRA. Is the distribution exempt?
Yes, if it is paid to you directly from the IRA and reported on your 1040 line 4b. An inherited IRA distribution is still an IRA distribution. If retirement income reaches you through an estate or trust on a Schedule K-1-T, it is handled on Schedule M instead of line 5.
I’m 70, still working, and taking required minimum distributions. What is taxed?
Your wages, and any interest, dividends or gains, at 4.95%. The required distributions and your Social Security are subtracted. You also get the $1,000 age exemption on top of the $2,925.
My annuity is not from a retirement plan. Is it exempt?
Generally no. The subtraction is for qualified employee plans, IRAs, government plans and Social Security. An annuity bought with after-tax money outside a retirement plan is taxed by Illinois on the same taxable portion the IRS taxes.
Retirement income never reaches the Illinois tax line
Put every dollar of it on line 5, keep the nonqualified annuities and the brokerage income off, and remember that a Roth conversion costs federal tax only.
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Written by Charles Trautman, EA, editor · Need to Know Tax, Lone Tree, Colorado
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