State Taxation of Retirement Income in Illinois

If you retire in Illinois, you may have to file a state income tax return if you file a federal return. According to the Illinois Department of Revenue, if you do not have to file a federal return but your base income for Illinois tax purposes is more than your exemption allowance, you must file an Illinois return. But all or much of your retirement income may be excluded from state income tax in Illinois.

Your base income for Illinois state income tax purposes is your federal adjusted gross income plus or minus certain adjustments. You can subtract Social Security and certain other retirement plan benefits that are included in your federal adjusted gross income. So if your only income is retirement income, and you do not have to file a federal return, you probably would not have to file an Illinois return or pay state income tax.

Interest and dividend income

If you have investments in mutual funds or in bonds or stocks that earn interest or dividends that are exempt from federal income tax, this income is included in your base income for Illinois tax purposes. So if the total amount of your exempt interest or dividend income is more than your exemption allowance you would have to file an Illinois return. The exemption allowance in Illinois is $2,000 (for 2009) for each exemption you could claim on a federal return, plus $1,000 per exemption for being age 65 or older or legally blind. Federally exempt interest and dividend income would be reported on line 2 of your Illinois state return, Form IL-1040.

On the other hand, if you have interest income from U.S. Treasury bonds, bills, notes, certificates or savings bonds that is included in your federal income tax return, you can subtract that amount on your Illinois return. You would report this amount on Schedule M, line 23.

Other additions for Illinois tax purposes

There are certain other amounts that you would have to include in calculating your Illinois base income. These amounts are reported on Schedule M and include withdrawals from a Medical Care Savings Account if the withdrawals were for purposes other than for paying qualified medical expenses, plus the interest on those withdrawals.

Retirement income

Retirement income that is excluded from your base income for Illinois state income tax purposes includes Social Security or railroad retirement benefits, distributions from Individual Retirement Accounts (IRAs) or self-employed retirement plans, 401(k) and other qualified employee benefit plans, state and local government deferred compensation plans, military retirement pay and other government retirement or disability plans, the redemption of U.S. retirement bonds, retirement payments to retired partners in partnerships, lump sum distributions of securities in a plan with your former employer, and the redemption of U.S. retirement bonds.

To the extent any of these types of retirement income are included in your federal adjusted gross income you would report them as a subtraction on line 5 of Illinois Form IL-1040.

Sources:
Form IL-1040 - Illinois Department of Revenue
Form IL-1040 Instructions - Illinois Department of Revenue
Publication 120 - Retirement Income - Illinois Department of Revenue
Schedule M Other Additions and Subtractions for Individuals - Illinois Department of Revenue