Does Illinois Tax Retirement Income? 2026 Rules & Estate Cliff

How Illinois taxes retirees (statute-cited)

The $4 million estate cliff (described correctly)

Probate and the new $150,000 small-estate limit

Is Illinois a good state to retire in for taxes?

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2026 edition · statute-cited · part of Clear Money Guide’s 51-state retirement tax series. This guide covers state taxes on retirement income and estate transfers; property and sales taxes vary by county and are outside its scope.

Updated July 24, 2026. Quick answer: no — Illinois is one of the few states that subtracts federally taxed retirement income from qualified plans and government plans: 401(k) and 403(b) distributions, state or local government 457 distributions, traditional IRA withdrawals (including Roth conversions), qualified private pensions, government pensions, railroad retirement, and Social Security (35 ILCS 5/203(a)(2)(F) and (L); IDOR Publication 120). The two catches: the flat 4.95% still applies to non-retirement income like interest, dividends and capital gains — and Illinois levies an estate tax that applies above a $4,000,000 threshold, and most guides describe it wrong.

Federal civil service pensions in Illinois: does Illinois tax federal pensions.

More Illinois IL-1040 and Schedule M lines, one by one: Schedule M line 21, Schedule M line 22 and Schedule M line 25.

More on public pension systems, topic by topic: Illinois SURS employment after retirement, Illinois SURS Disability Retirement Annuity and Illinois SURS service credit.

More on public pension systems, topic by topic: Illinois SERS returning to work and Illinois SERS early retirement and increases.

More state retirement-income schedules, line by line: Illinois IL-1040 line 5.

Inherited an IRA? What the state’s own documents say about taxing those withdrawals: Illinois tax on inherited IRA withdrawals.

Hold a 403(b) or 457(b)? What the state’s own documents say about taxing those withdrawals: does Illinois tax 403(b) and 457(b) withdrawals.

Drawing a pension? Whether the state withholds tax from it, from its own documents: Illinois tax withholding on pension payments.

Married, or planning for a spouse’s death? Whether the state is a community property state, from its own statutes: Is Illinois a community property state?.

Withdrawing from an IRA or 401(k)? Whether the state withholds tax from it, from its own documents: Illinois tax withholding on IRA and 401(k) withdrawals.

Selling your home? How the state taxes the profit, from its own tax documents: Does Illinois tax the profit from selling your home?.

For a pension earned elsewhere or paid after you move: does Illinois tax out-of-state pensions.

Looking ahead to 2027? The state’s estate tax exemption for deaths in 2027, from its own tax documents: Illinois estate tax exemption 2027.

Before the tax question, the Chicago police, firefighter and laborers’ pension funds, with refund, survivor and service credit rules from each fund’s own documents: Chicago police PABF retirement decisions, Chicago firefighters FABF retirement decisions and Chicago Laborers’ Fund retirement decisions.

Before the tax question, the Chicago Teachers’ Pension Fund refund, survivor and service credit rules from its own sheets: Chicago teachers CTPF retirement decisions.

Before the tax question, the Chicago municipal employees’ pension options and refund rules from the MEABF handbook: Chicago MEABF retirement decisions.

For trust income specifically: does Illinois tax trust income.

Inheriting from, or planning for, someone in this state? Whether the state has an inheritance tax, from its own tax documents: Does Illinois have an inheritance tax?.

For dividends and interest specifically: does Illinois tax dividends and interest.

For annuity payments specifically: does Illinois tax annuity income.

For military retired pay: does Illinois tax military retirement.

Saving for a child’s college? The state’s 529 break has its own page: Illinois 529 plan tax deduction.

For the sale of stocks, funds or real estate: does Illinois tax capital gains.

For 401(k) and IRA withdrawals specifically: does Illinois tax 401(k) and IRA withdrawals.

Before the tax question, the SERS payment elections, buyout and refund rules: Illinois SERS retirement decisions.

The state’s income tax schedule: the Illinois income tax rate for 2026.

Before the tax question, the SURS Traditional, Portable and RSP choice and refund rules: SURS retirement decisions.

Before the tax question, the IMRF pension choices: IMRF retirement decisions.

Related guides on this topic: Vermont Estate Tax (2026).

Related state retirement tax guides: Does Illinois Tax Roth Conversions? 2026 and Illinois to Mississippi Retirement Taxes.

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How Illinois taxes retirees (statute-cited)

Retirement income (401(k)/IRA/qualified pension/government pension/SS/Roth conversions)	Not taxed, subtracted (income from non-government deferred compensation plans and third-party sick pay does not qualify; 35 ILCS 5/203(a)(2)(F) and (L); IL-1040 Line 5; IDOR Pub. 120)
Military retirement	Not taxed (within the general subtraction)
Everything else (interest, dividends, capital gains, wages)	Flat 4.95%
Inheritance tax	None — Illinois’ death tax is an estate tax; guides conflating the two are wrong

Worked example: a retiree drawing $80,000 from a 401(k) plus Social Security owes Illinois $0 income tax. Add $20,000 of taxable brokerage dividends and the bill is $990 — 4.95% on the dividends only. Sequencing withdrawals from retirement accounts versus taxable accounts is the whole Illinois income-tax game.

Illinois is one of 43 jurisdictions that do not tax Social Security at any income level in 2026. The other 8 exempt benefits only up to an income or age limit. Full rules and statutes: the 51-state table.

The $4 million estate tax threshold

Illinois’ $4,000,000 exclusion is not a true exemption: above the $4M threshold, the Illinois Attorney General computes the tax with an interrelated calculation built on the federal state death tax credit as the Internal Revenue Code stood on December 31, 2001. The Attorney General’s own examples show the tax starting small and growing: $28 on an estate of $3,000,100 with $1,000,000 of adjusted taxable gifts, and $285,714 on a $5,000,000 estate that is all in Illinois. The exclusion is not inflation-indexed and there is no portability between spouses, so a couple’s home, retirement accounts and life insurance can cross the line without deliberate planning. Status note (July 2026): the Family Farm Preservation Act (SB 1688 / HB 2677), which would create a $6M indexed exemption for qualified farm estates, remains a bill, not law — despite some coverage implying otherwise. Full table: estate tax by state.

Probate and the new $150,000 small-estate limit

Personal-representative and attorney compensation is reasonable-basis (755 ILCS 5/27-1, 27-2) — no percentage schedule. The bigger news most guides missed: Illinois’ small-estate affidavit limit is now $150,000 of personal property (755 ILCS 5/25-1, as amended by P.A. 104-0346) — up from the $100,000 figure still cited across ranking pages — and motor vehicles registered with the Secretary of State transfer outside the limit regardless of value. Context: probate cost by state · small-estate limits by state · will vs. trust calculator.

Is Illinois a good state to retire in for taxes?

On the taxes this page covers, the honest split verdict: excellent for retirement income — a full exemption with no age gate or income cap that beats most “tax-friendly” states outright — and demanding for wealth at death, where the un-indexed $4M threshold with no spousal portability catches estates that owe nothing federally. Retirees living on 401(k)/IRA/pension income do exceptionally well here; those with large taxable portfolios or $4M+ estates need a plan. (Property taxes, Illinois’ other famous burden, vary by county and are outside this guide’s scope.)

Illinois vs. its neighbors

State	Social Security	Pension / 401(k) / IRA	Estate tax	Inheritance tax
Illinois	Not taxed	Not taxed (qualified and government plan income is subtracted)	Yes, above $4M, not indexed	None
Wisconsin	Not taxed	Exclude up to $24,000/person at 67+ (2025 Act 15)	None	None
Indiana	Not taxed	Fully taxable (state + county)	None	None (repealed 2012)
Michigan	Not taxed	Deductible up to ~$67,610/person (2026)	None	None
Florida	Not taxed	Not taxed (no income tax)	None	None

Comparison rows summarize general rules; see our 51-state retirement tax table for statute-cited detail.

Considering a Roth conversion? The converted amount is taxed as ordinary income in the year you convert, and Illinois may treat it differently from the retirement income above — see how all 51 jurisdictions tax Roth conversions.

Finding a financial advisor in Illinois

Per the SEC’s July 2026 Investment Adviser roster, Illinois has 674 SEC-registered advisory firms (#5 nationally) managing $7.94 trillion (#5 by AUM). Full breakdown: Illinois advisor statistics. Reviewing fee structures before or after a move: fee-drag calculator.

Thinking about moving?

Four taxes change when you move state in retirement, not one: income tax on withdrawals, state estate tax, state inheritance tax, and what probate costs your heirs. Corridor comparisons involving Illinois:

Leaving Illinois? See leaving Illinois in retirement.

Compare any two states with the retirement tax comparison tool, or browse all corridors at the relocation hub.

What probate costs in Illinois

Illinois sets probate compensation by a “reasonable fee” standard with no percentage schedule, so anyone quoting a firm figure is estimating. And the small-estate shortcut of $150,000 does not clear a solely owned house on its own, which is the detail most guidance omits. Full detail with the governing statute, the court filing fee and the threshold: Illinois probate cost. To price a specific estate, use the probate cost calculator.

Cite or share this guide

Suggested citation: Clear Money Guide, “Illinois Retirement Taxes (2026 edition),” statute-cited; clearmoneyguide.com/illinois-retirement-taxes/. Free to cite with attribution and a link. Data verified July 23–24, 2026 against state statutes, session laws, and revenue-department guidance.

Figures verified against 35 ILCS 5/201 and 5/203, IDOR Publication 120, the Illinois Attorney General estate tax fact sheet, 755 ILCS 5/25-1 with Public Act 104-0346, and the Illinois General Assembly status pages for SB 1688 and HB 2677 on September 30, 2026; the 0.8% to 16% estate tax rate range, the probate compensation cites and the Wisconsin and Michigan comparison rows were not re-checked.

Does Illinois Tax Retirement Income? The Full Exemption, the 4.95% Catch, and the $4 Million Estate Cliff

What this state guide covers

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