Illinois has a flat income tax rate of 4.95% on all wage and investment income

Illinois taxes your income at a single rate regardless of how much you earn. That rate is 4.95%, applied to wages, self-employment income, interest, dividends, and capital gains. Unlike federal income tax, which uses tax brackets that increase with income, Illinois treats everyone the same way.

This flat rate has been in place since 2017. Before that, the rate was 3.75%, but it increased as part of a broader tax reform. The rate applies to all residents and part-year residents who earned income in Illinois during the tax year.

You pay this tax on top of federal income tax. Your federal return and Illinois return are separate calculations, so you cannot reduce your Illinois tax by claiming deductions on your federal return unless those deductions also explore under Illinois law.

Key Takeaways

  • Illinois taxes all income at 4.95%, with no variation based on income level or filing status.
  • The tax applies to wages, self-employment income, interest, dividends, and long-term capital gains.
  • Illinois allows you to deduct federal income tax paid, which lowers your Illinois taxable income.
  • If you work in Illinois but live in another state, you may owe Illinois tax on wages earned here, though your home state may offer a credit.
  • Retirement income including Social Security, pensions, and distributions from retirement accounts are generally exempt from Illinois tax.

What income is subject to the 4.95% rate

The 4.95% rate applies to all types of income except those specifically exempted by law. This includes W-2 wages from an employer, net profit from self-employment, rental income, interest from savings accounts and bonds, dividends from stocks, and capital gains from selling investments.

Some income is exempt. Social Security benefits are not taxed by Illinois. Distributions from traditional IRAs, Roth IRAs, 401(k)s, and other retirement accounts are also exempt. Pension income, whether from a public employee pension or a private pension, is exempt. This exemption is one reason Illinois residents often see a lower effective tax rate than the 4.95% headline rate suggests.

Income from municipal bonds issued by Illinois municipalities is exempt. Income from bonds issued by other states' municipalities is taxable in Illinois, even if it is exempt in that state.

How the federal income tax deduction works

Illinois allows you to deduct the federal income tax you paid during the year from your Illinois taxable income. This is one of the largest deductions available and significantly reduces what you owe to Illinois.

To claim this deduction, you report the federal income tax shown on your federal return (line 24 on Form 1040 for tax year 2023, though line numbers change yearly). You subtract this amount from your total income before explore the 4.95% rate. The deduction is available whether you itemize or take the standard deduction on your federal return.

This deduction is why your effective Illinois tax rate is often lower than 4.95%. If you paid $5,000 in federal tax and earned $100,000, your Illinois taxable income would be $95,000, and you would owe $4,705.50 in Illinois tax, not $4,950.

Nonresidents and part-year residents

If you moved to or from Illinois during the year, you file as a part-year resident. You owe Illinois tax only on income earned while you lived in Illinois. Income earned before you moved to Illinois or after you moved away is not subject to Illinois tax, even if you earned it as an Illinois resident in prior years.

Nonresidents who worked in Illinois during the year owe tax on wages earned here. If you lived in another state but worked in Illinois, you file an Illinois return on that income. Your home state may allow you a credit for taxes paid to Illinois, so you do not pay tax twice on the same income, but you must claim that credit on your home state return.

The date you establish residency matters. Moving on June 15 means you are a resident for the full year if you intend to stay. Moving on December 31 means you are a part-year resident. Your intent to stay and where you maintain a home are the key factors, not the exact date you signed a lease.

Self-employment income and the 4.95% rate

If you are self-employed, you owe Illinois tax on your net self-employment income at the same 4.95% rate. Net income means revenue minus business expenses. You calculate this on your federal Schedule C, and the same net profit figure is used for Illinois tax purposes.

You also owe self-employment tax (Social Security and Medicare) to the federal government, calculated on Schedule SE. This is separate from Illinois income tax. Illinois does not impose a separate self-employment tax, but the 4.95% rate applies to your net profit just as it does to W-2 wages.

The federal income tax deduction still applies. If you owe $8,000 in federal self-employment tax plus federal income tax, you can deduct the total federal income tax portion from your Illinois taxable income.

How to calculate what you owe

Start with your total income from all sources: wages, self-employment, interest, dividends, capital gains, and any other taxable income. Subtract the federal income tax you paid. Multiply the result by 4.95%. That is your Illinois income tax.

Most people do not calculate this themselves. Your employer withholds Illinois tax from your paycheck based on a withholding form you complete. If you are self-employed or have income not subject to withholding, you may need to make estimated tax payments quarterly to avoid penalties.

When you file your Illinois return (Form IL-1040 or IL-1040-SR for seniors), you report all income, calculate the tax, subtract any withholding or estimated payments you made, and either receive a refund or owe the balance. The return is due the same day as your federal return, usually April 15.

Withholding and estimated payments

If you receive W-2 wages, your employer withholds Illinois tax automatically. The amount withheld depends on the form you file with your employer (Form IL-W-4). If you want more or less withheld, you can update this form at any time.

If you are self-employed, have significant investment income, or receive income without withholding, you may need to make estimated tax payments quarterly. These are due April 15, June 15, September 15, and January 15 of the following year. If you do not pay enough throughout the year, you may owe a penalty when you file, even if you ultimately get a refund.

You can check whether you are on track by running the numbers halfway through the year. If you have underpaid, you can increase withholding on W-2 income or make a larger estimated payment in the next quarter to catch up.

Frequently Asked Questions

Do I owe Illinois tax if I work in Illinois but live in another state?

Yes, you owe Illinois tax on wages earned in Illinois. You file an Illinois return on that income. Your home state may allow you a credit for taxes paid to Illinois, so you do not pay tax twice, but you must claim that credit on your home state return. Check your home state's rules on nonresident taxation.

Is Social Security taxed in Illinois?

No. Social Security benefits are completely exempt from Illinois income tax. Pensions and retirement account distributions are also exempt. This is one reason the effective tax rate for retirees is often much lower than 4.95%.

What if I moved to Illinois partway through the year?

You file as a part-year resident and owe tax only on income earned after you moved to Illinois. Income earned before you moved is not subject to Illinois tax. You must report the date you established residency on your return.

Can I deduct state income tax paid to another state?

No. Illinois does not allow you to deduct state income tax paid to other states. You can only deduct federal income tax. If you paid tax to multiple states, each state taxes you on income earned there, and you claim credits on each state return to avoid double taxation.

How often does the Illinois income tax rate change?

The rate is set by the Illinois legislature and does not change automatically. The current 4.95% rate has been in place since 2017. Any change requires a new law passed by the legislature and signed by the governor. Check the Illinois Department of Revenue website for updates if you are planning ahead.