Illinois collects state income tax from most residents and workers
Yes, Illinois has a state income tax. The current rate is a flat 4.95 percent on all income, meaning everyone pays the same percentage regardless of how much they earn. This is different from the federal system, which uses tax brackets that increase with income.
The state tax applies to wages, salaries, interest, dividends, and other income sources. If you work in Illinois or live there, you will owe state income tax unless you fall into a narrow category of exemptions. The tax is withheld from paychecks by employers, similar to federal withholding.
Key Takeaways
- Illinois charges a flat 4.95 percent state income tax on wages, investment income, and most other earnings.
- Your employer withholds state income tax from your paycheck automatically, just as they do for federal tax.
- Retirees over 61 do not pay state income tax on retirement income, including pensions and distributions from retirement accounts.
- You file Illinois state taxes using Form IL-1040 if you owe tax, though many residents file only federal returns if they may have access to for exemptions.
- Illinois also taxes capital gains at the same 4.95 percent rate, with no special lower rate for long-term gains.
Who pays Illinois state income tax and who does not
Most people who work in Illinois or live there pay the 4.95 percent tax on their income. However, Illinois grants a significant exemption to retirees: if you are 61 or older, you do not pay state income tax on retirement income. This includes distributions from IRAs, 401(k)s, pensions, and annuities. Wages you earn after age 61 are still taxable, but retirement account withdrawals are not.
Military members on active duty stationed in Illinois do not pay state income tax on their military pay. Some other narrow categories exist — for example, clergy can exclude housing allowances — but these affect very few people. If you are under 61 and working, you almost certainly owe the tax.
The exemption for retirees is one of the most generous in the country and is a reason some people move to Illinois after leaving the workforce. If you are considering retirement and live in or near Illinois, this exemption can meaningfully reduce your tax burden.
How withholding works and what to expect on your paycheck
Your employer deducts Illinois state income tax from your paycheck before you receive it, just as they do for federal income tax and Social Security. The amount withheld depends on the information you provide on Form IL-W-4, which you complete when you start a job. If you claim more allowances, less tax is withheld; if you claim fewer, more is withheld.
You can adjust your withholding at any time by submitting a new Form IL-W-4 to your payroll department. Many people adjust withholding if they get a large refund or owe money at tax time — both signals that the withholding was not matched to their actual tax bill. Unlike federal withholding, Illinois does not allow you to claim a specific dollar amount; you work with allowances instead.
If you have multiple jobs or your spouse also works, you may want to increase withholding on one paycheck to avoid underpaying. The state does not penalize underpayment the way the federal government does, but you will still owe the tax when you file your return.
Filing your Illinois state tax return
If you owe Illinois state income tax, you file using Form IL-1040, the state's basic income tax return. You must file if your income exceeds the filing threshold, which changes yearly. For the 2023 tax year, the threshold was $2,575 for most filers, though it is higher for those over 65. You can file on paper or electronically through the Illinois Department of Revenue website.
Many residents do not file a state return because they fall below the threshold or because they may have access to for the retirement income exemption. If you are under 61 and working, you almost certainly must file. The important date is the same as the federal important date — normally April 15 — and you can request an extension if you need more time.
If you overpaid through withholding, you receive a refund. Illinois typically processes refunds within four to six weeks of receiving your return, though electronic filing is faster than paper. You can check the status of your refund on the Department of Revenue website using your Social Security number and the amount you expect to receive.
Capital gains and investment income in Illinois
Illinois taxes capital gains — the profit you make when you sell an investment — at the same 4.95 percent rate as ordinary income. There is no preferential rate for long-term gains, unlike the federal system. If you sell a stock you held for five years and make a $10,000 profit, you owe $495 in Illinois state tax on that gain.
Dividends and interest from savings accounts and bonds are also taxed at 4.95 percent. This means Illinois residents pay state tax on investment income at the same rate as wages, which is higher than many neighbouring states offer. If you are a frequent trader or have significant investment income, this can be a meaningful cost to factor into your financial planning.
How Illinois state tax compares to neighbouring states
Illinois has a lower state income tax rate than some neighbours but higher than others. Indiana and Kentucky both tax income at 3.15 percent and 4.95 percent respectively, while Missouri charges 5.3 percent. Wisconsin taxes income on a sliding scale up to 7.65 percent. Iowa's top rate is 6.5 percent.
However, state income tax is only one part of your total tax burden. Sales tax, property tax, and local taxes vary widely across states and can offset a lower income tax rate. Illinois has a 6.25 percent state sales tax, though local jurisdictions add to this, bringing the total to between 6.25 and 10.25 percent depending on where you live. Property taxes in Illinois are also relatively high compared to the national average.
If you are considering a move based on taxes, look at your total tax picture — income, sales, property, and local taxes combined — rather than income tax alone. A state with lower income tax may cost you more overall if property or sales taxes are significantly higher.
What happens if you move out of Illinois
If you move out of Illinois during the year, you owe state income tax only on the income you earned while you were a resident. You file a part-year resident return using Form IL-1040-NR/PY. You will also need to file a return in your new state for the income you earned there.
If you move to a state with no income tax, such as Texas or Florida, you will not owe Illinois tax on income earned after you leave, but you must document when you moved. The state may ask for proof — a lease, utility bill, or driver's license with your new address — to confirm the date you became a non-resident. If you work remotely for an Illinois company but live elsewhere, you generally do not owe Illinois tax on that income, though some states have reciprocal agreements that complicate this.
Frequently Asked Questions
Do I have to pay Illinois state income tax if I work in Illinois but live in another state?
Yes, Illinois taxes income earned within the state, regardless of where you live. However, your home state may also tax that income. Most states offer a credit for taxes paid to other states to avoid double taxation, so you typically pay the higher of the two rates, not both. Check with your home state's tax authority for specifics.
Can I deduct federal income tax from my Illinois state return?
No. Illinois does not allow you to deduct federal income tax paid. You calculate your Illinois tax based on your income, explore the 4.95 percent rate, and that is what you owe. This is different from some other states that do allow this deduction.
What if I am self-employed — do I still owe the 4.95 percent?
Yes. Self-employed people pay the same 4.95 percent state income tax on their net business income. You do not pay it through withholding, so you may need to make estimated tax payments quarterly to avoid penalties. You can deduct business expenses before calculating the tax, just as you do on your federal return.
Does Illinois tax Social Security benefits?
No. Illinois does not tax Social Security benefits, even if you are under 61. However, if you have other income that pushes you above the filing threshold, you still must file a state return. The exemption applies only to Social Security itself, not to other retirement income like pensions or IRA withdrawals (unless you are 61 or older).
What is the penalty if I do not file or pay on time?
Illinois charges penalties for late filing and late payment, though the amounts are generally lower than federal penalties. The late-filing penalty is 5 percent per month up to 25 percent, and the late-payment penalty is 0.5 percent per month. Interest accrues on unpaid tax at a rate set quarterly by the Department of Revenue. If you cannot pay by the important date, file anyway to reduce penalties.