Since 1936, workers have paid into the Social Security system to help preserve a baseline income in their retirement years. Those funds accrue through the productive years and then become available at age 65, or earlier in some cases. Yet retirement disbursements are also taxed, in many cases, by the federal government and individual states.
Is Social Security taxed in Illinois? Our Chicago CPA firm of tax benefit experts and taxpayer advocates will help you understand state expectations and work to maximize your retirement income to understand who does and doesn't tax retirement income.
Illinois Social Security Benefits
The pool of capital that funds Social Security retirement income also goes to support disability payments for those who cannot earn a satisfactory income due to some type of infirmity. Does Illinois tax social security income? The state of Illinois does not collect Social Security through state income taxes, this is a U.S. government prerogative.
Many recipients of social security retirement benefits who live in Illinois are taxed by neither the feds nor the state because it is their sole source of livelihood or retirement income. For its part, the Prairie State leaves Social Security alone when levying personal or household revenue.
Does Illinois Tax Social Security Benefits?
The Illinois Department of Revenue does not treat Social Security as taxable income. While not counted as a tax-friendly state, Illinois nevertheless excludes Social Security, and other forms of retirement distributions, from its definition of taxable income. However, Illinois residents may still pay a levy on some or all of their Social Security payments. This tax is not due to the state, but to the federal government, i.e., the IRS. How much is owed, if any, turns on some factors:
- If the total annual income is beneath $25,000, there is no tax liability.
- If an individual has an income within the range of $25,000 and $34,000, the tax liability covers 50 percent of social security payments received.
- Individuals whose income tops $34,000 annually are subject to paying taxes on 85 percent of their yearly benefits.
- For married couples who file a joint return, if their combined income is between $32,000 and $44,000, then 50 percent of Social Security disbursement value is subject to taxation.
- Joint married filers will pay a tax of 85 percent of the value of their Social Security income if their total income is above $44,000.
So, many social security recipients living in Illinois pay taxes on Social Security benefits, and just not to the state of Illinois. State income taxes are not drawn from this federal entitlement.
What about Pensions and Other Retirement Plans?
Is there other retirement income besides Social Security benefits that Illinois taxes? In the interest of its citizens getting the most from their fixed incomes, the state generally applies no tax to Social Security benefits, private pension income, or retirement savings accounts, especially since these monies will already be targeted when they pay federal income taxes.
Among the retirement plans untouched by the state tax code are:
- Individual Retirement Accounts (IRAs), both traditional and Roth;
- Most employee benefit plans, e.g., 401 k accounts;
- Funds received upon cashing in U.S. retirement bonds;
- Deferred compensation accruals from state and local government;
- Income from government disability funds, whether civilian or military;
- Income from a railroad retirement account;
- Employer securities that grew with interest and disburse in a lump sum;
- Any Social Security benefits that have already been taxed by the IRS.
How about Thrift Savings Plan (TSP) Income?
The Thrift Savings Plan is a program run by the federal government to complement retirement income or pension income. Structured much like a 401 k, the government contributes five percent in matching funds to employee deposits. Retirement distributions from TSP are not subject to Illinois state tax.
Are IRAs or 401 k Accounts Exposed to Illinois Taxation?
Neither the traditional nor Roth IRA face levies from the state of Illinois. Likewise, 401 k retirement accounts are shielded from state income tax.
Is Military Retirement Income Taxable by the Department of Revenue?
Illinois is one of several states that refrains from taxing military retirement pay. Neither does the state take money from military disability income. There are other states that don't tax retirement income taxes.
Those retirees conscious of their money and its limits can consider Illinois a haven from state taxation as there is no Illinois social security tax. Social Security benefits and nearly all retirement income escape state taxes although retirees must pay federal taxes on this money in many instances. Its reputation notwithstanding, Illinois remains tax friendly insofar as retirement income goes.