Income Taxes in Illinois
Illinois's income tax is genuinely simple on the surface -- a flat 4.95% rate on wages -- but its single most distinctive feature is a real, substantial, no-threshold exemption of retirement income that this record treats as the centerpiece of Illinois's tax story for retirees specifically.
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Learn moreA simple, moderate flat rate on wage income
Illinois levies a flat 4.95% tax on Illinois taxable income -- a single rate, no brackets, applying the same way to every filer regardless of income level. This is a real, moderate rate, neither the lowest nor the highest built in this project, plus a real personal exemption ($2,425 per person for 2026).
Illinois's genuinely distinctive fact: a full, no-threshold retirement-income exemption
Illinois taxes NONE of a retiree's Social Security benefits, pension income (public or private, with no exemption cap), 401(k)/IRA distributions, railroad retirement benefits, or military retirement pay -- with no age or income threshold on the exemption. A retiree with $30,000 of Social Security, a $20,000 pension, and $40,000 of qualified 401(k) distributions can generally subtract the full $90,000 from Illinois taxable income. This is a real, substantial relocation positive for retirees specifically -- see the retiring topic.
Working-age movers should not read this as 'Illinois is a low-tax state' broadly
This record does not let Illinois's real retirement-income exemption bury its other genuine tax negatives. A working-age mover's actual tax burden is a separate calculation dominated by Illinois's property tax (statewide average effective rate tied for the highest in the nation) and, in Chicago specifically, a real, genuinely high combined sales tax -- see the property-taxes and sales-tax topics.
Illinois's fiscal backdrop: a real pension crisis alongside real, recent improvement
Illinois carries a real $143.5 billion unfunded state pension liability (the largest of any US state, per the Illinois Commission on Government Forecasting and Accountability) -- but Moody's upgraded Illinois's credit rating a full notch to A2 (stable) in October 2025, Illinois's best rating in more than 20 years, even as Illinois remains the nation's lowest-rated state. This record discloses both facts rather than picking the flattering half.
Key takeaways
- Illinois's state income tax is a simple flat 4.95% on wages, with a real $2,425-per-person personal exemption for 2026.
- Illinois's genuinely distinctive tax fact: a full, no-age/no-income-threshold exemption of Social Security, pension, and 401(k)/IRA income -- a real, substantial positive for retirees specifically.
- This exemption doesn't make Illinois a broadly low-tax state for working-age movers -- property tax and Chicago's sales tax are the bigger real costs to budget.
- Illinois carries a real $143.5 billion unfunded pension liability alongside a real October 2025 Moody's upgrade to A2 -- Illinois's best rating in 20+ years, though still the nation's lowest-rated state.
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