Illinois does not tax most pension income, but the rules depend on when you started receiving payments and what type of pension you have

Illinois has one of the most generous pension tax exemptions in the country. If your pension comes from a public employee system — police, fire, teacher, state worker — or from certain private pensions, you likely owe no state income tax on those payments. However, there are exceptions based on when you began receiving your pension, and federal taxes still apply to most pension income regardless of what Illinois does.

The key date is January 1, 2005. If you started receiving pension payments before that date, Illinois exempts all of your pension income from state tax. If you started after that date, the exemption applies only to the portion of your pension that comes from your own contributions — not from employer contributions or investment gains.

Key Takeaways

  • Pensions from public employee systems (IMRF, TRS, SERS, GARS) are exempt from Illinois state income tax if you began receiving them before January 1, 2005.
  • If you started receiving your pension after January 1, 2005, only the portion funded by your own contributions is exempt; employer contributions and earnings are taxable.
  • Federal income tax applies to nearly all pension income regardless of Illinois state tax rules, and you may owe federal tax even if you owe nothing to Illinois.
  • Military pensions and certain federal employee pensions have their own rules and may be treated differently than state or local pensions.
  • Your pension payer should send you a 1099-R form each year showing how much of your pension is taxable, which you use when filing both state and federal returns.

How the January 1, 2005 cutoff works

Illinois created this date as a dividing line between old and new pension recipients. Anyone who was already receiving pension payments on January 1, 2005, or who began receiving them on or after that date but had earned the pension before 1984, gets the full exemption. Everyone else gets a partial exemption.

To determine which category you fall into, look at your first pension payment. If it arrived before January 1, 2005, you are fully exempt. If it arrived on or after January 1, 2005, you need to know whether your pension was earned before 1984. Most people who retired after 2005 will fall into the partial exemption group, meaning you pay state tax on the employer-funded portion of your pension.

The partial exemption is calculated using a formula based on your contributions versus total pension value. Your pension payer — the Illinois Department of Retirement Systems, your municipal pension board, or your private plan administrator — should calculate this for you and report it on your 1099-R form.

Which pension systems are covered

The full exemption applies to pensions from these Illinois public systems: the Illinois Municipal Retirement Fund (IMRF), Teachers' Retirement System (TRS), State Employees' Retirement System (SERS), General Assembly Retirement System (GARS), and the Judges Retirement System. It also covers pensions from local police and fire pension funds, county employee systems, and certain university systems.

Private pensions — from a company you worked for, not a government employer — are also exempt under Illinois law, but only if you meet the date requirements. A pension from a private employer that you started receiving before 2005 is fully exempt. One you started after 2005 follows the same partial exemption rules as public pensions.

Military pensions are treated differently. Federal law allows military retirees to exclude military pension income from federal taxes only if they are disabled. Illinois does not tax military pensions at the state level, but you still owe federal tax unless you may have access to for the federal disability exclusion.

Federal taxes still apply to most pension income

Even though Illinois does not tax your pension, the federal government does. The only exceptions are military pensions for disabled veterans and certain federal employee pensions under specific conditions. If you receive a regular pension from a public or private employer, you will owe federal income tax on it.

Your pension payer withholds federal tax from each payment unless you file a W-4P form requesting no withholding. Many retirees choose to have taxes withheld to avoid a large bill when they file their federal return. You can adjust your withholding at any time by submitting a new W-4P to your pension administrator.

When you file your federal return, you report your pension income on Form 1040. If you also receive Social Security, the combination of your pension and Social Security may push some of your Social Security into taxable income — a rule that does not apply in Illinois.

How to report your pension on your Illinois return

You report your pension on the Illinois Form IL-1040 (Individual Income Tax Return). On Schedule C of that form, you list your total pension income, then subtract the exempt portion. Your pension payer's 1099-R form should show both the total and the taxable amount, which makes this calculation straightforward.

If you are fully exempt — because you started receiving your pension before 2005 — you report the full amount as income but then subtract it as an exemption. The result is zero Illinois tax owed on that income. If you are partially exempt, you report only the taxable portion.

Keep your 1099-R forms for at least three years. The Illinois Department of Revenue can request them if your return is audited, and you need them to prove your exemption claim.

What happens if you work while receiving a pension

Receiving a pension does not prevent you from working or earning other income. Your pension remains exempt (or partially exempt) regardless of how much you earn from a job. However, if you are still employed by a public pension system and have not yet retired, you cannot receive your pension while still working for that same system — this is called the "dual office" rule, and it varies by system.

If you work for a different employer after you start receiving your pension, there is no penalty or tax consequence. Your pension income and your wages are reported separately on your tax return. Your wages are subject to Illinois income tax at the normal rate (currently 4.95 percent), but your pension remains exempt or partially exempt as described above.

Frequently Asked Questions

Do I owe Illinois tax on my pension if I moved out of state?

No. Illinois does not tax pension income for anyone, regardless of where they live now. If you moved to another state, you may owe that state's tax on your pension — it depends on that state's rules — but Illinois will not tax it. You do not need to file an Illinois return if you have no other Illinois income and moved out of state.

What if my pension started before 2005 but I did not receive my first check until after 2005?

The date that matters is when you began receiving payments, not when you earned the pension. If your first check arrived after January 1, 2005, you fall under the partial exemption rules. However, if you earned your entire pension before 1984, you may may have access to for the full exemption even if you started receiving it after 2005 — check with your pension administrator about your specific situation.

Will my pension affect my Social Security taxes?

Your pension does not affect how much Social Security tax you owe, because you have already paid into Social Security through your wages. However, if you receive both a pension and Social Security, the combination may make some of your Social Security taxable at the federal level. Illinois does not apply this rule — your pension and Social Security are taxed separately for state purposes.

Do I need to file an Illinois return if my only income is a pension?

If your only income is a fully exempt pension (started before 2005), you have no Illinois income tax to pay and generally do not need to file an Illinois return. If you have a partially exempt pension or other income, you may need to file. Check the current filing requirements on the Illinois Department of Revenue website, as thresholds change yearly.

Can I claim my pension as a dependent on someone else's return?

No. Receiving a pension makes you ineligible to be claimed as a dependent by anyone else, regardless of how much the pension is or whether it is taxable. If someone else is supporting you and you receive a pension, you cannot be their dependent for tax purposes.