Illinois charges a flat tax rate on most income

Illinois has a flat income tax rate of 4.95% on wages, salaries, and most other income. This rate applies to all residents and has been in place since 2017. Unlike states with graduated brackets that increase as your income rises, Illinois takes the same percentage from everyone.

The 4.95% rate is what you owe to the state on top of federal income tax. Your employer withholds this from your paycheck, or you pay it when you file your state return if you're self-employed or have income not subject to withholding.

Some types of income are taxed at different rates or not taxed at all. Interest and dividend income, for example, is taxed at 4.95%. But retirement income — including Social Security, pensions, and distributions from retirement accounts — is generally exempt from Illinois state income tax.

Key Takeaways

  • Illinois taxes most income at a flat rate of 4.95%, meaning the same percentage applies whether you earn $30,000 or $300,000 per year.
  • Social Security benefits, pensions, and retirement account withdrawals are not subject to Illinois state income tax.
  • Your employer should withhold the 4.95% from your paycheck automatically, but you can adjust your withholding if too much or too little is being taken out.
  • Self-employed people and those with income not subject to withholding must pay estimated taxes quarterly or settle the full amount when filing their return.
  • Illinois offers a property tax credit and an earned income tax credit that may reduce the amount you owe, depending on your income and property taxes paid.

What income is subject to the 4.95% tax

The 4.95% rate applies to wages and salaries from your job. It also applies to net income from self-employment, interest, dividends, capital gains, and rental income. If you receive a 1099 form for contract work or freelance income, that's taxable at 4.95% as well.

Bonuses, commissions, and tips are all subject to the same rate. Unemployment benefits are also taxable under Illinois law, though the federal government allows an exclusion on your federal return.

Income that is not taxed by Illinois

Social Security retirement benefits are completely exempt from Illinois state income tax. This applies whether you're receiving benefits as a retiree, a surviving spouse, or a dependent child. You do not have to report Social Security on your Illinois return.

Pension income and distributions from retirement accounts — including IRAs, 401(k)s, and 403(b)s — are also exempt. This exemption covers both the contributions you made and the earnings that accumulated over time. Military retirement pay is exempt as well.

Other income that escapes the 4.95% tax includes certain scholarships and grants used for tuition, gifts, and life insurance proceeds. Municipal bond interest is exempt under federal law and therefore not taxed by Illinois either.

How withholding works and what to do if it's wrong

Your employer calculates the 4.95% withholding based on your W-4 form and the number of allowances you claim. If you claim too many allowances, too little will be withheld and you'll owe money when you file. If you claim too few, you'll get a refund but you're giving the state an interest-free loan.

You can adjust your withholding at any time by submitting a new W-4 to your payroll department. The Illinois Department of Revenue website has a withholding calculator to help you figure out the right number of allowances. Changes take effect on your next paycheck.

If you have multiple jobs, side income, or a spouse who also works, withholding can get complicated. The calculator accounts for these situations, but if you're unsure, filing a new W-4 with fewer allowances is the safer choice — you'll just get a refund instead of owing.

Self-employed people and estimated taxes

If you're self-employed or have income that isn't subject to withholding, you must pay estimated taxes to Illinois. These are quarterly payments due on April 15, June 15, September 15, and January 15 of the following year.

To calculate your estimated tax, multiply your expected net self-employment income by 4.95%. If you expect to owe $1,000 or more for the year, you should make quarterly payments. If you underpay, you may owe a penalty when you file your return.

Many self-employed people find it easier to set aside 5% of their income each month and pay the full amount when filing their annual return in April. This avoids the complexity of quarterly payments, though you'll still owe a penalty if your total payment is significantly short.

Tax credits that reduce what you owe

Illinois offers an Earned Income Tax Credit for lower-income working people. The amount depends on your income and filing status. Unlike the federal EITC, the Illinois version is not refundable — it can only reduce the tax you owe, not create a refund.

The state also offers a Property Tax Credit for renters and homeowners with low to moderate income. This credit is based on the property taxes or rent you paid during the year and your household income. The maximum credit varies by year but is typically several hundred dollars.

To claim either credit, you must report it on your Illinois tax return. The instructions and worksheets are included with the return form, or you can find them on the Illinois Department of Revenue website. These credits can significantly reduce your tax bill if you meet the income limits.

Filing your Illinois return and paying what you owe

Illinois residents file their state return using Form IL-1040 or IL-1040-SR (for seniors). You must file if your income exceeds the filing threshold, which varies by age and filing status. Even if you don't have to file, you should if you had taxes withheld — you may be due a refund.

You can file online through the Illinois Department of Revenue website, by mail, or through a tax preparer. The deadline is April 15 of the following year, the same as federal taxes. If you can't file by then, you can request an extension, but you still owe any taxes due by April 15.

If you owe money, you can pay online, by check, or through an installment plan. The Department of Revenue charges interest on late payments, starting at 0.5% per month. Setting up a payment plan early can help you avoid penalties and interest.

Frequently Asked Questions

Do I have to pay Illinois income tax if I live in another state but work in Illinois?

Yes. Illinois taxes income earned within the state, regardless of where you live. However, you may be able to claim a credit on your home state's return for taxes paid to Illinois to avoid double taxation. The rules vary by state, so check with your home state's tax authority.

Is there a state income tax on retirement account withdrawals?

No. Withdrawals from IRAs, 401(k)s, and other retirement accounts are exempt from Illinois state income tax. This includes required minimum distributions. The exemption applies to both pre-tax and after-tax contributions and all accumulated earnings.

What happens if I don't pay my Illinois taxes?

The Illinois Department of Revenue can place a lien on your property, garnish your wages, or intercept your tax refunds. Interest accrues at 0.5% per month, and penalties can add 5% to 25% depending on the reason for non-payment. Contacting the Department early to set up a payment plan can reduce these consequences.

Can I deduct federal income taxes from my Illinois return?

No. Illinois does not allow a deduction for federal income taxes paid. You calculate your Illinois tax on your federal adjusted gross income, with some modifications. This is one reason Illinois taxes are relatively straightforward compared to other states.

Do I owe Illinois income tax on unemployment benefits?

Yes, unemployment is taxable under Illinois law. However, the federal government allows you to exclude up to $10,200 of unemployment benefits on your federal return for 2020 and 2021. Illinois follows federal law on this exclusion, so you may not owe state tax on that portion even though it's technically subject to the state tax.