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[Video] Does IL Tax Retirement Income? An IL Tax Guide. Thumbnail

[Video] Does IL Tax Retirement Income? An IL Tax Guide.

Does your retirement income get taxed in Illinois? Find out in this quick overview of Illinois tax laws. We also examine property, sales, gas, alcohol, and other taxes IL residents pay.

Is retirement income taxed in Illinois? Short answer: no.

Illinois is currently one of 13 states that does not tax retirement income. This means no tax on Social Security, no tax on pension income, and no tax on distributions from 401(k)s, 403(b)s, traditional IRAs, or any other tax-deferred retirement accounts.

It's important to note that federal taxes still apply to these incomes. Also, even though Illinois does not tax retirement, it does have some of the highest average property and sales tax rates in the country. 

Here's a high-level summary of the tax landscape in Illinois:

Income tax:

 Illinois has a flat income tax rate of 4.95 percent. Illinois' flat income tax rate means that all residents, regardless of income level, pay the same individual income tax rate of 4.95 percent. Also, nonresidents working in Illinois must pay state income tax, except for those residing in Wisconsin, Iowa, Kentucky, or Michigan. These states have reciprocal agreements with Illinois, so you only pay income tax to the state where you primarily live, not the state where you work.

Property taxes: 

On average, property taxes are 2.08% of a home’s assessed value. Real estate taxes vary depending on where you live, but the average property tax rate in Illinois was 2.08 percent of a home’s assessed value in 2021, according to the Tax Foundation. As you can probably imagine, the Chicagoland area pays some of the highest property taxes in the state, and the state has the second-highest average property tax rate in the country, after New Jersey. 

Sales tax:

The average sales tax: including local sales tax, is 8.83%. The state levies a 6.25 percent sales tax statewide, but local municipalities can add up to 4.75 percent in local sales tax. But as I mentioned, the combined average sales tax rate, statewide, is 8.83 percent. And in Chicago, it is a bit higher at 10.25 percent. Certain goods, like groceries, medicine, and hygiene products, are taxed at reduced rates.

Gas tax:

Illinois currently imposes a state gas tax of 45.4 cents per gallon, one of the highest in the U.S.  

Alcohol taxes: 

Consumers pay state sales and local tax on beer, wine, and liquor. Excise taxes are levied at the state and local level. These taxes are paid by the vendor, but some or all may be included in the retail price. The state excise tax on liquor with more than 20 percent alcohol is the highest, liquor with under 20% alcohol is taxed a bit less, as is wine, and beer is taxed the least but is still taxed. And Chicago, of course, tacks on their own pound of flesh depending on type and percentage of alcohol.

Lottery taxes:

Illinois withholds state taxes (4.95 percent) on lottery winnings of at least $1,000. The state lottery also is required to withhold federal taxes (24 percent) on winnings of $5,000 or more. 

Now for a few common questions:

Investment income:

Sometimes I get asked how investment income is taxed in IL. Well, it’s taxed at 4.95% - the same tax rate as other income. 

Estate tax:

Will I or my heirs have to pay inheritance and estate tax in Illinois?

Illinois has no state tax on inheritance, but estates are taxed 0.8 percent to 16 percent after a $4 million exclusion. And if you have an estate valued at over $4 million dollars, you will definitely want to speak to an estate planning attorney to avoid paying the state more than necessary. You should always have an estate plan but certainly if your estate is valued at over $4 million dollars in Illinois.

Sidenote: Estate taxes must be paid to the Illinois State Treasurer no later than nine months after one’s death. Even if no tax is due, filing a return is required, on all estates of $4 million and above.

Minimum wage:

And it isn’t a tax, but one more important item in Illinois is that, as of 2024, the minimum wage is now $14 per hour for non-tipped workers and $8.40 per hour for workers who also receive tips. 

Bottom line: 

If you live in Illinois, and you’re not an ostrich with your head in the dirt, or a felon and have decided not to pay taxes, I’m sure we have all noticed our taxes are relatively higher than other states. So, it is nice that Illinois does not tax any retirement income. 

But like with most decisions, there are pluses and minuses: would I like to pay less taxes? Sure. Who wouldn’t? But there are many other things I do enjoy about living in central Illinois. So, taxes are always an important consideration, but remember not to let the tax tail wag the dog.

A CERTIFIED financial planner™ professional can help you plan for your retirement. Schedule a call today so we can talk about your situation. 

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