TRS of Illinois

Legislation and Issues

Extending the Illinois Income Tax to Pensions and Retirement Income

Issue: Currently, Illinois citizens do not have to pay Illinois income tax on pensions and other retirement income. Legislative leaders have discussed changing the law to extend the income tax to pensions and all retirement income.

Discussion: No legislation has been drafted yet, but initial suggestions called for taxing pensions at 5 percent – which is the current state individual tax rate. He estimated that extending the income tax to retirement income would raise $1.6 billion annually for the state. Any extension of the income tax would exempt “modest pensions,” but that has yet to be defined.

TRS has not seen any specific language so it is difficult to analyze the concept. However, it is likely that extending the income tax to retirement income would be challenged in court. Taxing pensions and retirement income also will be very difficult to pass in the legislature because seniors are a large, active group of voters and they do go to the polls.

TRS cannot predict what the courts may do, but it is likely that extending the income tax to pensions is constitutional and would not violate the pension protection clause of the Illinois Constitution. Taxing pensions does not diminish or impair the benefit teachers and public employees receive, it is a tax on that benefit. In a practical sense, taxing pensions does diminish the retirement benefit. Legally, however, it would not be a diminishment.