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.
Most Tax Friendly Places for Retirees
SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.
Methodology Our study aims to find the areas with the most tax-friendly policies for retirees. To do that we looked at how the tax policies of each city would impact a retiree with a $50,000 income. Our hypothetical retiree is getting $15,000 from Social Security benefits, $10,000 from a private pension, $15,000 from retirement savings like a 401(k) or IRA and $10,000 in wages.
To calculate the expected income tax this person would pay in each location we applied deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at the federal, state, county and local levels.
We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.
In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income less income tax. This product is then multiplied by 35% to estimate the sales tax paid.
For fuel taxes, we first distributed statewide vehicle miles traveled down to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.
For each city we determined whether or not Social Security income was taxable.
Finally, we created an overall index weighted to best capture the taxes that most affect retirees. We gave a 4x weighting to income tax, 3x weighting to property tax rate, a 2x weighting to sales tax and 1x weighting to fuel tax.
Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2014 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration
