Retiring in Illinois? Here’s What to Know About Social Security and Taxes

For retirees, Illinois can be a surprisingly tax-friendly place to land. While it may not be known for warm winters or low property taxes, Illinois offers full exemptions on Social Security and most retirement income – a significant financial advantage that can make a meaningful difference to your golden years.

Whether you’re a lifelong resident or considering a move to the Prairie State for retirement, understanding how Illinois treats various sources of income is key to building a smarter, more efficient retirement strategy.

Let’s take a closer look at what retirees can expect.

SOCIAL SECURITY BENEFITS IN ILLINOIS: FULLY EXEMPT FROM STATE TAX

One of the most beneficial perks for retirees in Illinois is that Social Security benefits are not subject to state income tax. That includes:

• Traditional retirement benefits
• Disability benefits
• Survivor benefits
• Supplemental Security Income

This full exemption applies regardless of your income level. That means your Social Security checks remain intact from the state’s perspective – a notable win compared to the 10+ states that partially or fully tax this income.

ILLINOIS EXCLUDES MOST RETIREMENT INCOME FROM TAXATION

Illinois doesn’t just stop at Social Security. The state takes a broad approach to retirement-friendly tax policy, excluding a wide range of common income sources, including:

• Withdrawals from 401ks and traditional IRAs
• Roth IRA and Roth 401k distributions
• Income from public or private pensions
• Military retirement income
• Certain annuity payments

This consistent treatment helps retirees maintain predictability and control, especially for those managing multiple income streams across various account types.

One thing to note: non-retirement income, such as wages, rental income, business income and investment earnings (like dividends and capital gains), is taxed at Illinois’s flat income tax rate of 4.95%.

FEDERAL TAXES STILL APPLY TO YOUR SOCIAL SECURITY

Even though Illinois gives your Social Security a pass, the IRS does not. Depending on your total income, the federal government may tax up to 85% of your benefits.

To determine your taxable amount, the IRS uses provisional income, which includes:

• Your adjusted gross income
• 50% of your Social Security benefits
• Tax-exempt interest, such as from municipal bonds

Here’s how federal thresholds break down:

If you’re drawing income from a traditional IRA or 401k, for example, your provisional income may cross those thresholds. With careful retirement planning, however, it’s possible to reduce how much of your benefits are subject to federal tax.

OTHER TAX CONSIDERATIONS FOR RETIREES IN ILLINOIS

While the state’s treatment of retirement income is generous, other taxes may affect your retirement budget. Here's what to keep in mind:

SALES TAX

Illinois has a statewide sales tax rate of 6.25%, but local additions can bring the total rate above 10% in some municipalities. For retirees who spend more on services, dining or health care-related items, this can add up.

PROPERTY TAX

Illinois has some of the highest property taxes in the country, with rates averaging around 2.1% of a home’s assessed value. That can translate into a significant annual cost for homeowners – especially in higher-value metro areas.

However, several property tax relief programs are available to eligible seniors, such as:

• Senior Citizens Homestead Exemption
• Senior Citizens Assessment Freeze
• Property tax deferral programs for low-income seniors

These benefits can help manage property tax burdens, but they require proactive enrollment and documentation.

ESTATE AND INHERITANCE TAX

Illinois does impose a state estate tax on estates valued above $4 million, unlike many states that align with the higher federal exemption. There is no inheritance tax, but high-net-worth households should consult a financial advisor to ensure their estate plans account for potential state-level exposure.

FIVE STRATEGIES TO STRETCH YOUR RETIREMENT DOLLAR FURTHER

While Illinois offers built-in tax advantages for retirees, smart planning is still important – especially when it comes to federal tax exposure, withdrawal timing and income sequencing. Here are five strategies that can help:

1. WAIT A LITTLE LONGER TO CLAIM SOCIAL SECURITY

Delaying your Social Security benefits beyond full retirement age doesn’t just mean a bigger monthly check — it can also give you more flexibility in managing your other income sources. If you hold off until age 70, you can use those early retirement years to draw from tax-deferred accounts at potentially lower tax rates, keeping more of your Social Security untaxed when you eventually start claiming it.

2. USE ROTH WITHDRAWALS TO FINE-TUNE YOUR TAX BRACKET

Qualified distributions from Roth IRAs or Roth 401ks don’t show up in your adjusted gross income or count toward federal thresholds for taxing Social Security. That gives you a powerful tool for keeping your taxable income – and your overall tax bill – in check, especially in years when other income sources may bump you into a higher bracket.

3. BE STRATEGIC ABOUT WHICH ACCOUNTS YOU TAP FIRST

The order in which you withdraw from your investment accounts can make a big difference in what you owe at tax time. By planning how and when to pull from taxable, tax-deferred and tax-free accounts, you can help reduce unnecessary taxes, avoid triggering Medicare surcharges and keep your income smooth and predictable.

4. GIVE TO CHARITY THE TAX-EFFICIENT WAY

If giving back is part of your retirement plan and you’re over age 70 ½, a Qualified Charitable Distribution might be worth considering. You can transfer up to $108,000 per year directly from your IRA to a qualified charity, satisfying all or part of your Required Minimum Distribution without increasing your taxable income.

5. CONSIDER GRADUAL ROTH CONVERSIONS

Converting a portion of your traditional IRA into a Roth can be a smart move – especially if you expect your tax rate to rise later. By spreading conversions over multiple years, you may avoid big spikes in income and reduce the impact of future RMDs, all while building up a pool of tax-free income for later in retirement.

LIVING OR MOVING TO ILLINOIS IN RETIREMENT? PLAN AHEAD

Whether you’re preparing to retire in Illinois or already enjoying your post-career years, it’s important to have a plan. Illinois may offer generous tax treatment on retirement income, but property tax planning, estate considerations and federal tax exposure all play a role in how long your money lasts.

If you’re relocating from another state, you’ll also want to formally establish Illinois residency to avoid any confusion around tax obligations. That typically involves:

• Spending at least 183 days in Illinois each year
• Updating your driver’s license and voter registration
• Filing Illinois state tax returns when applicable
• Updating legal documents to reflect your new domicile

BUILDING A STRONGER RETIREMENT PLAN IN ILLINOIS

Illinois retirees benefit from one of the most comprehensive state-level tax exclusions for retirement income, but that’s just one piece of the puzzle. Managing federal taxes, estate planning and health care costs are all essential to making your retirement more financially secure.

At Edelman Financial Engines, we help retirees across the country build personalized, tax-smart retirement strategies. From Social Security optimization to withdrawal sequencing and estate planning, we’ll help you align your income plan with your goals. Take the first steps to learning how to make your retirement income go further – no matter where you call home.