Illinois treats income from retirement sources differently from some states. In Illinois, you do not have to pay income tax on the money you get from your retirement. Because of this, the retirement income you receive from various retirement sources should go farther in this state than in states that do tax retirement income.
Qualified Employer Retirement Plans
Employer retirement plans includes 401(k) plans, Simplified Employee Pension Plans (SEP IRA), Savings Incentive Match Plans for Employees (SIMPLE IRA) and any pension plan reported on a form 1040, line 16b of your individual income tax return or form 1040A as well as any income reported on line 12b of your tax return. It also includes government retirement and disability plans reported on line 7 of your 1040 or 1040A, state and local government deferred compensation plans reported on line 7 or 16b of form 1040 or line 7 or 12b of the 1040A. Finally, all retirement payments to retired partners reported on line 17 of IRS form 1040 are exempt.
Individual Retirement Accounts
Individual retirement accounts (IRAs) are retirement plans that are not part of an employer-based retirement plan. Traditional versions of this plan type allow you to make contributions to the plan on a tax-deductible basis. However, some plans allow Roth designated contributions. These Roth accounts only allow after-tax contributions with tax-free distributions at the federal level during retirement. Traditional accounts are taxed at the federal level when you withdraw the money in retirement. Illinois, however, does not tax IRAs or self-employed retirement plans. Any income you receive from these plans, which is reported on line 15b of your 1040 or line 11b of your 1040A, is not subject to Illinois tax.
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Social Security is a retirement income safety net established and maintained by the U.S. government. These benefits, which are reported on line 20b of your 1040 or 14b of your 1040A, are not taxed. The exemption extends to railroad retirement benefits as well.
Capital gains are gains you experience from the sale of investments. The gain you realize is the difference between the amount of money you receive from your investment and the amount of money you invested. In other words, if you invest $100 and receive $150 when you sell the investment, you have a 50 percent gain. The $50 is subject to capital gains at the federal level. Illinois, however, does not tax any gains reported on line 13 of your 1040 relating to capital gains derived from your employer's securities.