Illinois Plans 4.95% Flat Tax on Retirement Income in 2026, Ending Exemptions

(ILLINOIS) — Illinois residents who receive retirement income generally must still file a state return when required, but for tax year 2026 they do not pay Illinois income tax on qualifying retirement distributions, even though the state keeps its 4.95% flat income tax on most other income.

That rule matters to retirees, new immigrants, green card holders, and visa holders alike. If you are an Illinois tax resident and your income includes a pension, 401(k) withdrawal, IRA distribution, or Social Security benefit, Illinois generally excludes that income from state tax. The key requirement is Illinois tax residency, not citizenship.

For immigrants, this can be confusing because federal and state rules are different. You may be a noncitizen for immigration purposes, yet still qualify for the Illinois exemption if you file Form IL-1040 as a resident or part-year resident. Federal tax may still apply, and federal filing status still matters.

Current as of April 2, 2026.

Who can claim the Illinois retirement income exemption in 2026

Illinois fully exempts all retirement income from state income tax in 2026. This applies while Illinois continues to impose a 4.95% flat income tax on taxable non-retirement income, such as wages, self-employment income, and some investment income.

The exemption applies broadly to Illinois residents, including:

• U.S. citizens
• Green card holders
• H-1B, L-1, O-1, and TN visa holders
• Other nonimmigrant workers
• Retirees using an ITIN or SSN

The main question is not immigration category. The main question is whether you are an Illinois resident for tax purposes.

Eligibility checklist

⚠️ Warning: The exemption covers retirement income for Illinois purposes. It does not automatically exempt that income on your federal return.

What counts as exempt retirement income

Illinois excludes retirement income from state income tax. retirees pay 0% Illinois tax on qualifying retirement amounts.

This generally includes:

• Pension income
• 401(k) distributions
• Traditional IRA withdrawals
• Roth IRA distributions, if taxable federally
• Social Security benefits
• Certain retirement payments reported through partnerships, with updated reporting on Schedule M, Line 14

If your income comes only from those sources, you may owe no Illinois income tax, though a filing requirement can still exist in some cases.

If you also earn wages, consulting income, rental income, or business income, those amounts are usually still subject to the state’s 4.95% flat income tax.

What changed for 2026

For tax year 2026, Illinois has not changed the retirement income exemption. State guidance indicates that the exemption remains in place.

The notable updates are more about reporting than taxability:

• Certain partner retirement payments are reported on Schedule M, Line 14
• The Illinois personal exemption rises to $2,925
• No enacted 2026 law taxes retirement income

You may hear about House Resolution 112. That measure expresses opposition to future taxation of retirement income. It does not change current law. It has no direct legal effect on your 2026 return.

Illinois remains one of 13 states that exempt all retirement distributions from state income tax in 2026.

Special points for immigrants and visa holders

Illinois state tax residency is separate from federal tax residency. That distinction matters.

For federal returns, immigrants often need to determine status under the Green Card Test or Substantial Presence Test. IRS Publication 519, U.S. Tax Guide for Aliens, explains those rules. You can review our guide on tax residency.

For Illinois, the issue is simpler. If Illinois treats you as a resident, your retirement income is generally exempt.

Examples:

• An H-1B worker who retires in Illinois and receives pension payments can generally exclude those payments from Illinois tax.
• A green card holder living in Illinois and taking IRA withdrawals generally gets the same Illinois exemption.
• A part-year resident who moved to Illinois during 2026 may need to file as a part-year resident and apply the subtraction on the Illinois return.

Immigration status does not block the exemption. An ITIN can be used if you do not have an SSN.

Step-by-step: How to file and claim the exemption

Here is the basic filing process for most immigrants and retirees.

1. Determine your federal filing status first

Start with your federal return. Illinois begins with federal income concepts.

You may need:

• Form 1040
• Form 1040-SR, if eligible
• Form 1040-NR, if you are a nonresident alien for federal purposes

Immigrants should check IRS Publication 519 and any treaty rules in Publication 901. Treaty claims are federal issues. Illinois may not follow every federal treaty result.

2. Determine your Illinois residency status

You will usually file as one of these:

• Full-year resident
• Part-year resident
• Nonresident

If you lived in Illinois more than 183 days or kept a permanent home there, you likely have a resident filing position.

3. Complete Form IL-1040

Use Form IL-1040 for your Illinois individual income tax return.

Illinois generally starts from your federal adjusted gross income, then applies state additions and subtractions.

4. Use Schedule M to subtract retirement income

This is the critical step.

Retirement income is generally removed from Illinois base income through a subtraction on Schedule M. For 2026, retirement amounts are not simply ignored. They must be reported correctly and then subtracted under the Illinois rules.

For many taxpayers, that means:

• Report income as required
• Complete Schedule M
• Claim the retirement income subtraction, including eligible amounts on the correct line
• Pay Illinois tax only on remaining taxable income

If you receive retirement payments through a partnership, pay attention to the updated reporting on Schedule M, Line 14.

5. Check healthcare-related forms if relevant

Healthcare can affect your federal return, even if it does not change the Illinois retirement exemption.

You may need:

• Form 1095-A if you had Marketplace coverage
• Form 8962 for the Premium Tax Credit
• Form 1095-B or 1095-C for coverage records

Retirement distributions can affect your federal adjusted gross income. That can affect Marketplace subsidy reconciliation or Medicare premium brackets, even though Illinois exempts the income.

6. File by the deadline or request an extension

File on time, even if you owe no Illinois tax. Late filing can still create problems.

📅 Deadline Alert: For tax year 2026, Illinois and federal individual returns are generally due April 15, 2027. An extension to October 15, 2027 gives more time to file, not more time to pay.

Documents you’ll need

Before you file, gather these records:

• Social Security number or ITIN
• Government-issued ID
• Form SSA-1099 for Social Security benefits
• Forms 1099-R for pensions, annuities, IRA, or 401(k) distributions
• W-2s for wages
• 1099-INT, 1099-DIV, or 1099-B for investment income
• Federal return copy, including Form 1040, 1040-SR, or 1040-NR
• Illinois Form IL-1040
• Illinois Schedule M
• Healthcare forms, such as 1095-A and Form 8962, if applicable
• Records showing when you lived in Illinois, if residency is unclear

If you are a recent immigrant, also keep entry dates and visa history. Those dates may affect your federal tax residency. They can also support your state residency position.

Filing deadlines and extensions for 2026 returns

If you are abroad on the regular due date, federal rules may grant an automatic two-month extension to June 15, 2027 for filing. Interest still applies to unpaid tax from April 15. Check IRS instructions for your filing status.

Common mistakes to avoid

These are the errors I see most often with immigrant retirees and mixed-status households:

• Reporting retirement income on Illinois forms but failing to subtract it on Schedule M
• Assuming federal tax treatment and Illinois treatment are identical
• Filing as a nonresident when facts support Illinois residency
• Ignoring taxable non-retirement income, such as wages or consulting income
• Forgetting healthcare subsidy reconciliation on the federal return
• Using the wrong taxpayer ID

💡 Tax Tip: If you changed from work status to retirement during 2026, separate your wage income from retirement distributions before preparing Schedule M.

Federal issues still matter

Illinois may exempt retirement income, but the federal return can still create tax.

That is especially true for immigrants who are:

• First-year residents
• Dual-status aliens
• Treaty claimants
• Married to a nonresident alien spouse
• Filing with foreign accounts or pensions

If you held foreign financial accounts over $10,000 in aggregate, review FBAR rules. If you do not have an SSN, review ITIN filing.

Useful federal references include:

• IRS Publication 519: U.S. Tax Guide for Aliens
• IRS Publication 901: U.S. Tax Treaties
• IRS Publication 17: Your Federal Income Tax
• IRS international taxpayers portal: irs.gov/individuals/international-taxpayers
• IRS forms and publications: irs.gov/forms-pubs

IRS resources and professional help

For Illinois questions, review current IL-1040 and Schedule M instructions from the Illinois Department of Revenue before filing your 2026 return in 2027.

For federal questions, start with:

• IRS Publication 519
• Publication 901
• Form 1040 or Form 1040-NR instructions
• The IRS international taxpayers page

You should get professional help if any of these apply:

• You moved into or out of Illinois during 2026
• You have both U.S. and foreign retirement income
• You changed from F-1 or J-1 status to H-1B or another work visa
• You are filing a dual-status return
• You claimed a treaty position
• You received Marketplace health insurance subsidies

For 2026 returns filed in 2027, your action steps are simple: confirm Illinois residency, collect 1099-R and SSA-1099 forms, complete Form IL-1040 and Schedule M, and file by April 15, 2027. If you are part-year resident or dual-status for federal purposes, speak with a CPA or enrolled agent before filing.

⚠️ Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax situations vary based on individual circumstances. Consult a qualified tax professional or CPA for guidance specific to your situation.