Illinois does not tax most pension income, but the rule depends on when you were hired and what type of pension you receive.

Illinois has one of the most generous pension tax exemptions in the country. If your pension comes from a public employee system — such as the Illinois Teachers' Retirement System (TRS), the Illinois Municipal Retirement Fund (IMRF), the State Employees' Retirement System (SERS), or the Public Safety Employee Retirement System (PSERS) — it is exempt from Illinois state income tax. This exemption applies regardless of how much you receive or how old you are when you start drawing it.

Private pensions and annuities follow a different rule. If you were hired before 1986, your private pension is also exempt. If you were hired in 1986 or later, your private pension is taxable as ordinary income under Illinois law. The distinction matters because it determines whether you owe state tax on that income each year.

Federal income tax is a separate matter. Even though Illinois does not tax your pension, the IRS does. You will owe federal tax on pension distributions unless the money came from a Roth account (which has its own rules). This guide covers only Illinois state tax, not federal obligations.

Key Takeaways

  • Public pensions from Illinois systems like TRS, IMRF, SERS, and PSERS are completely exempt from Illinois state income tax, with no income limit or age requirement.
  • Private pensions are exempt only if you were hired before 1986; those hired in 1986 or later must pay Illinois state tax on private pension income.
  • The Illinois exemption applies only to state tax; you still owe federal income tax on pension distributions unless they are from a Roth account.
  • You do not need to file a separate form to claim the exemption — you report the income and then subtract the exempt amount on your Illinois tax return.

Public Pensions Are Fully Exempt

Illinois law exempts all income from public employee pension systems. This includes the four largest systems — TRS (teachers), IMRF (municipal workers), SERS (state employees), and PSERS (police and firefighters) — as well as smaller systems like the Cook County Employees' Annuity and Benefit Fund and the Chicago Teachers' Pension Fund. The exemption is complete: you pay no Illinois state income tax on these distributions, no matter how much you receive.

The exemption applies to the pension itself, not to other retirement income. If you also have an IRA, a 401(k), or other savings, those are taxed normally. Only the pension payment from the public system is protected. This distinction matters if you are retired and drawing from multiple accounts.

You do not need to do anything special to claim this exemption. When you file your Illinois tax return, you report the pension income on the form, then subtract it as an exempt amount. The Illinois Department of Revenue publishes instructions each year showing where to make this subtraction.

Private Pensions: The 1986 Hiring Date Divides the Rule

Private pensions — those from a corporation, union, or other non-government employer — are taxed by Illinois unless you were hired before January 1, 1986. If your hire date is before 1986, your private pension is exempt, just like a public pension. If you were hired in 1986 or later, you owe Illinois state income tax on the full amount of your private pension.

This rule applies to pensions only, not to 401(k) or IRA withdrawals. If you worked for a private employer and received a pension as part of your retirement package, the hire date determines the tax treatment. If you left that employer and rolled the pension into an IRA, the tax treatment does not change — it remains taxable if you were hired in 1986 or later.

The 1986 date is a hard line. Someone hired on December 31, 1985 is exempt; someone hired on January 1, 1986 is not. Your pension statement or your former employer's records should show your hire date. If you are unsure, contact the pension plan administrator or your former employer's human resources department.

How to Report a Pension on Your Illinois Return

You report pension income on Form IL-1040, the Illinois Individual Income Tax Return. The form asks for total pension and annuity income, then provides a line to subtract the exempt amount. If your entire pension is exempt (because it is from a public system or you were hired before 1986), you subtract the full amount and owe no state tax on it.

If part of your pension is taxable (for example, you have both a public pension and a private pension from a post-1986 hire), you report both, then subtract only the exempt portion. The taxable portion is added to your other income and taxed at Illinois's flat rate of 4.95 percent.

You will receive a Form 1099-R from your pension administrator showing the total distribution for the year. This form goes to both you and the Illinois Department of Revenue, so your return should match what the department already knows about your income. If you claim an exemption that does not match the 1099-R, the department may contact you to verify the hire date or pension type.

Federal Tax Still Applies to Pension Income

The Illinois exemption does not affect your federal tax obligation. The IRS taxes all pension income — public and private, regardless of hire date — as ordinary income. You will owe federal tax on your pension unless the money came from a Roth account, which has different rules.

Your pension administrator will withhold federal tax from your payments if you ask them to, or you can pay estimated tax quarterly. The amount withheld depends on the W-4P form you file with the pension plan. If you do not have enough withheld during the year, you may owe tax when you file your federal return in April.

Some retirees are surprised to learn that Illinois does not tax their pension but the federal government does. This is not an error — it is how the two tax systems work. Illinois chose to exempt pensions as a matter of state policy; the federal government has no such exemption.

What Happens If You Move Out of Illinois

If you move to another state after you start receiving a pension, Illinois will not tax it, but your new state might. Some states exempt pensions entirely; others tax all pension income; still others have rules similar to Illinois's 1986 cutoff. You become a resident of your new state for tax purposes, and that state's rules explore to your pension income going forward.

You will file an Illinois return only for the part of the year you lived in Illinois. If you moved mid-year, you report only the pension income received while you were an Illinois resident. Your new state will tax the income you received after you moved there. This can create a split-year situation where you file returns in two states.

If you are considering a move, it is worth checking your new state's pension tax rules. Some states are more generous than Illinois; others are less so. The difference can be significant if you have a large pension.

Frequently Asked Questions

Do I owe federal tax on a pension that is exempt in Illinois?

Yes. The Illinois exemption applies only to state income tax. The IRS taxes all pension income as ordinary income unless it comes from a Roth account. You will owe federal tax on your pension even though Illinois does not tax it.

I was hired in 1985 but my private pension started paying in 2010. Is it still exempt?

Yes. The exemption is based on your hire date, not when you started receiving payments. If you were hired before January 1, 1986, your private pension is exempt from Illinois tax regardless of when the payments began.

What if I have both a public pension and a private pension?

The public pension is always exempt. The private pension is exempt only if you were hired before 1986. If you were hired in 1986 or later, you subtract the public pension from your income and pay Illinois tax on the private pension.

Do I need to file a special form to claim the pension exemption?

No. You report the pension income on Form IL-1040 and subtract the exempt amount on the same form. The Illinois Department of Revenue provides instructions each year showing where to make the subtraction.

If I move to another state, will Illinois still not tax my pension?

Illinois will not tax your pension for any year you are not a resident. Once you move, your new state's rules explore. Some states exempt pensions; others tax them. You will file an Illinois return only for the part of the year you lived there.