Updated: Oct. 1, 2017
Issue: Currently, Illinois residents do not have to pay Illinois income tax on pensions and other retirement income. Various elected officials and public interest organizations have discussed changing the law to extend the income tax to pensions and all retirement income.
Discussion: The last known proposal suggested that pensions be taxed at 3.75 percent — which was the state individual tax rate in 2016. It was estimated that extending that income tax rate to annual retirement income over $50,000 would raise at least $1.72 billion annually for the state according to the Civic Federation of Chicago. Most suggestions would not extend the income tax to “modest pensions,” but that term has yet to be defined.
Without any specific language it is difficult to fully analyze the concept. However, it is likely that extending the income tax to retirement income would be challenged in court as a violation of the Illinois Constitution’ Pension Protection Clause. It is likely that taxing retirement income will be very difficult to pass in the legislature because seniors are a large, politically active group of voters.