Illinois allows a subtraction on Form IL-1040, Line 5 for the federally taxed portion of retirement income from qualified employee benefit plans (including 401(k)s), IRAs (including Roth conversions), self-employed retirement plans, government retirement and disability (including military), railroad retirement, and Social Security benefits. Early distributions are also eligible. (Source: IDOR FAQ and Publication 120, December 2025 edition.)
Additional exclusions include state/local government deferred compensation (IRC 457), capital gains on employer securities in lump-sum distributions, U.S. retirement bond interest, and group term life insurance premiums from qualified or government plans. Retirement payments to retired partners also qualify. Taxpayers must attach federal return copies or Forms 1099-R/SSA-1099.
Exceptions: Income from non-qualified plans (third-party sick pay, non-government deferred comp/disability) is not subtractable. Ordinary income using special 10-year averaging on Form 4972 is also ineligible. The subtraction applies only to the federally taxed portion, not the gross amount.
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Does Illinois Tax My Pension, Social Security, or Retirement Income?