Illinois — Personal Income Tax

Illinois imposes a tax measured by net income on every individual, trust, and estate for each taxable year on the privilege of earning or receiving income in or as a resident of the state. The tax applies to Illinois residents on all income from any source, and to nonresidents only on income earned or received from Illinois sources. The tax is in addition to all other occupation or privilege taxes imposed by the state or its municipalities.

For individuals, trusts, and estates, the current tax rate is 4.95 percent of net income, effective July 1, 2017. Illinois uses a flat-rate structure with no graduated brackets.

Source: 35 ILCS 5/201; Illinois Department of Revenue – Income Tax Rates

An individual is an Illinois resident for personal income tax purposes under either of two tests. First, an individual who is in Illinois for other than a temporary or transitory purpose during the taxable year is a resident. Second, an individual who is domiciled in Illinois but is absent from the state for a temporary or transitory purpose during the taxable year is also a resident.

Illinois residents are taxed on all income from any source, regardless of where earned. Nonresidents are taxed only on income earned or received from Illinois sources. The determination is inherently fact-specific and depends on the individual's intent and the nature of their presence or absence.

The regulations clarify that brief visits for vacation, a particular transaction, or a short-term engagement constitute temporary or transitory purposes. In contrast, presence in Illinois for an indefinite period to recuperate from illness, for long-term business purposes, for indefinite employment, or after retirement without definite intention to leave shortly is considered other than temporary or transitory.

Source: 35 ILCS 5/1501(a)(20); 86 Ill. Admin. Code § 100.3020

Illinois individual income tax returns for calendar-year filers are due April 15 of the year following the tax year. If April 15 falls on a weekend or holiday, the return is due on the next business day. The state grants an automatic six-month extension of time to file, moving the extended deadline to October 15 for calendar-year filers. An extension to file does not extend the time to pay; any tax owed must be paid by the original April 15 deadline to avoid penalties and interest.

Source: Illinois Department of Revenue – When is my individual income tax return due; Illinois Department of Revenue – Due Date/Extension

Illinois base income for individuals equals the taxpayer's federal adjusted gross income (AGI) as modified by Illinois-specific additions and subtractions. The starting point is the AGI amount from the federal return, which the taxpayer must then adjust. Common additions include interest and dividends excluded from federal AGI (such as municipal bond interest from other states). Common subtractions include retirement income and Social Security benefits that are taxable federally but exempt in Illinois. The statute prescribes the complete list of required modifications.

Source: 35 ILCS 5/203; Illinois Department of Revenue – How is Illinois base income figured?

Illinois allows a personal exemption equal to a base amount of $2,050 plus an annual cost-of-living adjustment determined under the statute. For tax year 2026, the total exemption is $2,925 per qualifying individual. Taxpayers who are age 65 or older, or who are legally blind, may claim an additional $1,000 exemption. The exemption allowance is completely disallowed if federal adjusted gross income exceeds $500,000 for married filing jointly, or $250,000 for all other filing statuses.

Source: 35 ILCS 5/204; Illinois Department of Revenue – Personal Exemption Allowance

Illinois taxes compensation paid to nonresidents based on where the services are physically performed, not where the employer is located or where the employee resides. Under 35 ILCS 5/302(a), all items of compensation paid in Illinois to a nonresident individual and all items of deduction directly allocable to that compensation are allocated to Illinois.

Determining "Paid in This State"

Compensation is considered "paid in this State" when it is compensation for services performed in Illinois. The statute cross-references Section 304(a)(2)(B) for the determination of when compensation is paid in Illinois. The critical distinction is between the physical location of work performance and other factors such as employer location, payment location, or employee residence.

For a nonresident working partly in Illinois and partly in other states, Illinois taxes the portion of total compensation that the services performed in Illinois bear to total services performed everywhere. The regulations provide that compensation is allocated based on the ratio of days worked in Illinois to total days worked during the relevant period.

Working Remotely for an Illinois Employer

A nonresident employee who performs services entirely outside Illinois for an Illinois-based employer does not owe Illinois income tax on that compensation, even if the employer withholds Illinois tax or the employee receives payment in Illinois. The sourcing follows the location of service performance, not the employer's location or domicile.

Conversely, a nonresident who physically works in Illinois—whether at an employer's Illinois office, at a client site in Illinois, or at a temporary Illinois work location—incurs Illinois source income for the days worked in the state. The employer's state of incorporation or headquarters location is irrelevant to the sourcing determination.

Reciprocal Exemptions

Illinois has entered into reciprocal agreements with certain neighboring states under 35 ILCS 5/302(b). Under a reciprocal agreement, compensation paid in Illinois to a resident of the reciprocal state is exempt from Illinois taxation, and Illinois residents working in the reciprocal state are exempt from that state's tax. As of the statute's current provisions, reciprocal agreements must comply with the requirements of the Department of Revenue Law at 20 ILCS 2505/2505-575.

Iowa, Kentucky, Michigan, and Wisconsin are the states with which Illinois maintains income tax reciprocity agreements. A nonresident from one of these states who works in Illinois claims exemption by filing Form IL-W-5-NR with the employer, which stops Illinois withholding. The reciprocal exemption does not apply to residents of states without an agreement; for example, Indiana residents working in Illinois owe Illinois income tax on their Illinois-source compensation.

Part-Year Residents

Individuals who move into or out of Illinois during the tax year are part-year residents subject to different allocation rules under 35 ILCS 5/301(b). Part-year residents are taxed on all income earned during the period of Illinois residency, regardless of where earned, and only on Illinois-source income during the nonresident period. The nonresident compensation sourcing rules apply only to the portion of the year the individual was a nonresident.

Professional Athletes and Specialized Rules

Illinois has a specific statutory allocation formula for nonresident professional athletes under 35 ILCS 5/302(c)(iv). The Illinois source income of a nonresident professional athlete is the total compensation multiplied by a fraction: the numerator is duty days spent in Illinois, and the denominator is total duty days spent everywhere. Travel days that do not involve a game, practice, team meeting, or similar team event are not counted as Illinois duty days but are included in the total duty-day denominator.

Source: 35 ILCS 5/302; 86 Ill. Admin. Code § 100.3120

Illinois allows taxpayers to subtract most federally taxed retirement income from their Illinois base income, effectively exempting it from the state's 4.95 percent tax. The subtraction is claimed on Form IL-1040, Line 5, and applies to both Illinois residents (on all retirement income regardless of source) and nonresidents (on retirement income from Illinois sources during any nonresident period).

Qualified Retirement Income Eligible for Subtraction

Under 35 ILCS 5/203(a)(2)(F), taxpayers may subtract the federally taxed portion—not the gross amount—of income received from:

• Qualified employee benefit plans including 401(k) plans, 403(b) plans, and other employer-sponsored plans defined in Internal Revenue Code Sections 402 through 408, reported on federal Form 1040 or 1040-SR, Line 5b.
• Individual Retirement Accounts (IRAs) including traditional IRA distributions, Roth IRA conversions, and self-employed retirement (SEP) plans, reported on federal Form 1040 or 1040-SR, Line 4b.
• Social Security benefits reported on federal Form 1040 or 1040-SR, Line 6b. Social Security withheld from wages shown on Form W-2 is not subtracted here.
• Railroad retirement income reported on federal Form 1040 or 1040-SR, Lines 5b and 6b.
• Government retirement and disability plans including military retirement plans, reported as wages on federal Form 1040 or 1040-SR, Line 1z.
• State or local governmental deferred compensation plans paid under IRC Section 457, reported on federal Form 1040 or 1040-SR, Lines 1z and 5b.
• Group term life insurance premiums paid by a qualified retirement plan or government retirement plan and included as wages.
• Capital gains on employer securities received in a lump-sum distribution, to the extent the gains are due to net unrealized appreciation, reported on Schedule D.
• Ordinary income from qualified retirement plans for which the taxpayer elected the special 10-year averaging method on federal Form 4972.
• Retirement payments to retired partners reported on Schedule K-1-P and Schedule K-1-T (claimed on Schedule M, not Line 5).

No Age or Income Limitations

The retirement income subtraction has no age requirement and no income cap. Early distributions from qualified plans and IRAs—including those taken before age 59½ that trigger the federal 10 percent early withdrawal penalty—still qualify for the Illinois subtraction. Similarly, the subtraction applies regardless of the taxpayer's total income; a retiree with $3 million in total income subtracts retirement income the same way as a retiree with $30,000.

Income Not Eligible for Subtraction

Not all retirement-related income qualifies. Income that does not qualify for the subtraction includes:

• Non-qualified deferred compensation plans such as top-hat plans, supplemental executive retirement plans (SERPs), or other arrangements that are not qualified employee benefit plans under IRC Sections 402–408.
• Non-governmental Section 457(f) plans (governmental 457 plans do qualify; private employer 457(f) plans do not).
• Disability income from non-governmental plans or private disability insurance policies.
• Wages reported on Form W-2, even if the employer describes them as related to retirement.

Publication 120 specifies that only the federally taxed portion of a distribution qualifies. If part of a distribution represents a return of after-tax contributions and is not included in federal adjusted gross income, that portion is not subtracted on the Illinois return because it was never added to Illinois base income in the first place.

Documentation and Reporting

Taxpayers claiming the retirement income subtraction on Line 5 must attach federal Form 1040 or 1040-SR, Pages 1 and 2, to the Illinois return. If the retirement income is not clearly identified on Lines 4b, 5b, or 6b of the federal return, the taxpayer must also attach Form 1099-R or Form SSA-1099, as applicable. For state or local governmental deferred compensation under IRC Section 457, taxpayers must attach Form W-2 or Form 1099-R showing the amount paid. For capital gains on employer securities, taxpayers must attach Schedule D and Form IL-4644.

Certain retirement income reported on Schedule K-1-P (retirement payments to retired partners) and Schedule K-1-T (beneficiary shares from trusts or estates) should be claimed on Schedule M, not on Line 5, per the IL-1040 instructions.

Part-Year Residents and Nonresidents

Individuals who move into or out of Illinois during the tax year are part-year residents. Under 35 ILCS 5/301(b), part-year residents are taxed on all income (including all retirement income) earned during the period of Illinois residency, and only on Illinois-source income during the nonresident period. The retirement income subtraction applies to qualified retirement income received during both the resident and nonresident portions of the year, but the allocation of that income between the two periods follows the general part-year resident rules on Schedule NR.

Nonresidents are taxed only on Illinois-source income. Retirement income is generally sourced to the recipient's state of residence, not the state where the income was earned during working years. Therefore, a nonresident who receives a pension from an Illinois employer while living in another state typically does not owe Illinois tax on that pension, and the question of the subtraction does not arise. However, if a nonresident does have Illinois-source retirement income (for example, a part-year resident who received a distribution during the Illinois-resident portion of the year), the subtraction is available for the qualifying income.

Source: 35 ILCS 5/203; Illinois Department of Revenue Publication 120, Retirement Income; Illinois Department of Revenue – Social Security benefits and certain retirement plans