Overview of Illinois Retirement Tax Friendliness
Illinois exempts nearly all retirement income from taxation, including Social Security retirement benefits, pension income and income from retirement savings accounts. However, the state has some of the highest property and sales taxes in the country.
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Illinois Retirement Taxes
Thinking about a retirement in the Land of Lincoln? Whether you’re settling down in Chicago, Peoria or Springfield, you’ll want to know about the taxes paid by Illinois retirees.
The state exempts nearly all retirement income from taxation, but that doesn’t mean an Illinois retirement will be tax-free. The state has some of the highest property and sales taxes in the country.
A financial advisor can help you plan for retirement and other financial goals. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Is Illinois tax-friendly for retirees?
Most, but not all, retirees will find Illinois to be tax-friendly. The state has full deductions for Social Security, pension income and income from retirement savings accounts, including IRAs. In other words, retirees who are not working won't be subject to the state's 4.95% flat income tax rate.
However, retirees in Illinois do pay other types of taxes, namely the state’s sales and property taxes. The state charges a 6.25% sales tax, while local sales taxes can range up to 5.25%. The median effective property tax rate is 2.23% – higher than every state but New Jersey. Illinois also has its own estate tax that goes up to 16%.
Is Social Security taxable in Illinois?
When filling out an Illinois income tax return, all Social Security income can be subtracted from total income, as it is not taxed.
Are other forms of retirement income taxable in Illinois?
Just as Social Security income can be subtracted from total income, so too can other forms of retirement income. Deductions are allowed for all income from pensions, whether public or private, and income from retirement savings accounts. So, for example, if you withdraw $20,000 from an IRA over the course of a year, that money is not taxed at the state level.
How high are property taxes in Illinois?
The median effective property tax rate in Illinois is 2.23%, the-second highest rate of any state. That means a homeowner in Illinois can expect to pay about $4,744 in annual property taxes on a median home valued at $288,700. That will vary by location of course, but seniors who intend to buy property in Illinois for their retirement should plan on paying significant taxes on that property.
What is the Illinois homestead exemption?
The Illinois general homestead exemption is available to homeowners who's home is their primary residence. The exemption is equal to the difference between the property’s current equalized assessed value (EAV) and the EAV in 1977, up to a maximum of $6,000. In Cook County, the maximum is $10,000, while it's worth $8,000 in counties that share a border with Cook County.
Persons 65 years of age and older can also claim the senior citizen homestead exemption. This is equal to $5,000 off your home's EAV ($8,000 in Cook County and bordering counties). It is currently available to homeowners with a total household income of less than $65,000.
How high are sales taxes in Illinois?
Sales taxes in Illinois are quite high, as the state rate is 6.25%. Additionally, counties and cities collect their own taxes, which can reach up to 5.25%. The total rate, taking the state and highest local rates into account, is above 11%. This is one of the highest in the U.S.
Additionally, both food and medicine are taxed in Illinois, albeit at lower rates than the above. The statewide rate on these items is 1%.
What other Illinois taxes should I be concerned about?
Illinois has an estate tax, with the exemption being $4 million, which is lower than the 2023 and 2024 federal estate tax exemptions of $12.92 million and $13.61 million, respectively. That means estates that do not owe federal estate tax may still owe Illinois estate tax, at rates as high as 16%. It’s a good idea to keep this in mind if you plan on leaving behind a large inheritance for your loved ones.
