Including retirement income in the illinois income tax base

February 27, 2014

Including retirement income in the illinois income tax base


Illinois allows individuals to subtract retirement income from the tax base, leaving no state income tax on payments received from Social Security, 401(k) plans, Individual Retirement Accounts, defined benefit pension plans, and virtually any other payment from a qualified retirement plan. Illinois is virtually unique among states in providing such a blanket exclusion.

The Illinois Comptroller estimates in the 2012 Tax Expenditure Report that the value of the tax expenditure for retirement income, including Social Security, was $1.963 billion in 2012. Because research has not found any significant tax-induced migration across states by retirees, the Comptroller’s estimate reasonably reflects the amount of revenue this tax policy could generate.

If Illinois legislators are concerned about the effect of such a tax policy on lower income households, they could provide an increased level of exemption for age 65+ households.


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Research Area: Economic Policy

Policy Initiative: none