Updated October 5, 2026. Quick answer: Yes. Illinois starts from federal income (“Enter the adjusted gross income from your federal return.”) and taxes it at a flat rate: “The Illinois income tax rate is 4.95 percent (.0495).” Interest on U.S. Treasury and agency obligations is subtracted on Schedule M.
How Illinois treats dividends and interest
| Item | What the documents say |
|---|---|
| Treatment | Taxed at the flat rate; federal interest subtracted |
| Rate | 4.95 percent |
| Federally exempt interest | Add back “Enter the amount of federally tax-exempt interest and dividend income” on Form IL-1040, Line 2 |
| Municipal bonds | Schedule M says interest on “state and local government obligations is not exempt from Illinois Income Tax” unless legislation specifically exempts it |
| U.S. obligations | Subtract “U.S. Treasury bonds, bills, notes, savings bonds, and U.S. agency interest”; no dollar cap is printed |
| Personal exemption | $2,850 for tax year 2025 |
A $20,000 example
Taxable dividends and interest of $20,000 are taxed at 4.95%, computed as $20,000 x 4.95% = $990, before the $2,850 personal exemption allowance.
What changes in 2026
The latest documents read print no 2026 change to the way dividends and interest are taxed.
Federal rules
The state’s treatment sits on top of the federal one. Qualified dividends and ordinary dividends are sorted out on the Form 1099-DIV, as the site explains in Box 1a and 1b: ordinary versus qualified dividends, and interest is reported as covered in 1099-INT Box 1. The IRS explains the federal side in Topic no. 403, Interest Received and Topic no. 404, Dividends.
Related: whether Illinois taxes capital gains, whether Illinois taxes pensions, how Illinois taxes retirement income, dividends and interest tax by state, and how tax-exempt interest is reported.
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Answer againSources
- 2025 Form IL-1040 Instructions (Illinois Department of Revenue): https://tax.illinois.gov/content/dam/soi/en/web/tax/forms/incometax/documents/currentyear/individual/il-1040-instr.pdf
- Income Tax Rates (Illinois Department of Revenue): https://tax.illinois.gov/research/taxrates/income.html
- Schedule M Instructions, Other Additions and Subtractions for Individuals (Illinois Department of Revenue): https://tax.illinois.gov/content/dam/soi/en/web/tax/forms/incometax/documents/currentyear/individual/il-1040-schedule-m-instr.pdf
Sources: the primary documents linked above, read on October 5, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the plan administrator or the agency itself is the right place to confirm anything consequential.