Social Security is taxed differently in Illinois than in most other states

Illinois does not tax Social Security benefits at the state level. If you receive Social Security in Illinois, you will not owe state income tax on those benefits, even if you have other income. This is one of the most favorable state tax treatments for retirees in the country.

However, you may still owe federal income tax on your Social Security benefits depending on your total income. The federal government taxes Social Security based on what the IRS calls "combined income" — a formula that includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits. Whether you pay federal tax has nothing to do with living in Illinois; it depends only on how much total income you have.

Many people are surprised to learn that Social Security is taxable at all. The rules have been in place since 1983, and they affect millions of retirees. Understanding how the federal tax works helps you plan your income and avoid an unexpected tax bill.

Key Takeaways

  • Illinois does not tax Social Security benefits, so you owe no state tax on these payments no matter how much you receive.
  • The federal government may tax your Social Security benefits if your combined income exceeds certain thresholds: $25,000 for single filers and $32,000 for married couples filing jointly.
  • Combined income includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits — not just the benefits themselves.
  • You can reduce the amount of federal tax owed on Social Security by managing other income sources, such as delaying retirement or withdrawing less from savings in a given year.
  • The IRS does not automatically withhold federal tax from Social Security payments, so you may need to make quarterly estimated tax payments or request withholding.

How the federal government calculates taxable Social Security

The IRS uses a two-tier system to determine how much of your Social Security is subject to federal income tax. The thresholds are $25,000 for single filers, $32,000 for married couples filing jointly, and $0 for married couples filing separately.

Your "combined income" is calculated as your adjusted gross income plus nontaxable interest plus half of your Social Security benefits. If your combined income falls below the threshold for your filing status, none of your Social Security is taxed. If it exceeds the threshold, up to 50 percent of your benefits may be taxable, and in some cases up to 85 percent may be taxable.

For example, if you are single and have $20,000 in pension income and $18,000 in Social Security benefits, your combined income is $20,000 plus $9,000 (half your benefits), which equals $29,000. This exceeds the $25,000 threshold by $4,000. You would owe federal tax on up to 50 percent of the amount over the threshold, which is $2,000 of your Social Security benefits.

The calculation is complex because it includes income you may not think of as taxable, such as tax-exempt bond interest. If you have any nontaxable income, add it to your other income before checking the threshold.

What counts as income for the Social Security tax calculation

The IRS counts many types of income toward the combined income threshold. Wages, self-employment income, pensions, and distributions from retirement accounts all count. So do capital gains, rental income, and dividends.

Income that does not count includes Supplemental Security Income (SSI), railroad retirement benefits, and veterans' benefits. However, nontaxable interest from municipal bonds does count, which surprises many people. If you own tax-exempt bonds, you must include that interest in your combined income calculation even though you do not owe federal tax on the interest itself.

Withdrawals from a Roth IRA do not count as income if you have owned the account for at least five years and meet other conditions. Withdrawals from a traditional IRA, 401(k), or similar account do count as income in full, regardless of whether you took the withdrawal by choice or were required to take it.

When you owe federal tax on Social Security in Illinois

You may owe federal income tax on your Social Security if your combined income exceeds the threshold for your filing status. The amount you owe depends on your total tax bracket and how much of your benefits are taxable.

If you are single with combined income between $25,000 and $34,000, up to 50 percent of your benefits may be taxable. If your combined income is above $34,000, up to 85 percent of your benefits may be taxable. For married couples filing jointly, the first threshold is $32,000 and the second is $44,000.

You do not automatically owe tax just because you receive Social Security. Many retirees in Illinois have combined income below the threshold and owe no federal tax on their benefits. Others have income above the threshold but still owe little or no tax because only a portion of their benefits are taxable and their overall tax bracket is low.

How to handle federal tax withholding on Social Security

The Social Security Administration does not automatically withhold federal income tax from your benefits. You have the option to request withholding, but you must ask for it. If you do not request withholding and you expect to owe federal tax, you may need to make quarterly estimated tax payments to the IRS.

To request federal tax withholding from your Social Security benefits, complete Form W-4V and submit it to your local Social Security office or mail it to the address on the form. You can choose to have 7, 10, 12, or 22 percent of your benefits withheld. Many people choose 10 or 12 percent as a starting point.

If you prefer not to request withholding, you can make quarterly estimated tax payments directly to the IRS using Form 1040-ES. Estimated payments are due on April 15, June 15, September 15, and January 15. Missing a payment can result in penalties and interest.

Some retirees use a combination of both methods — requesting withholding from Social Security and making additional estimated payments if they have other income. Talk to a tax professional about which approach works best for your situation.

Ways to reduce federal tax on Social Security

If your combined income is close to the threshold, small changes to your income can make a difference. One strategy is to delay taking Social Security if you are still working. Wages from employment count toward combined income, so reducing work income reduces the amount of Social Security that is taxable.

Another strategy is to manage withdrawals from retirement accounts. If you have a choice about when to withdraw from an IRA or 401(k), taking withdrawals in years when your other income is lower can keep your combined income below the threshold. This is different from required minimum distributions, which you must take once you reach age 73 (as of 2023).

Converting a traditional IRA to a Roth IRA increases your taxable income in the year of conversion, which can increase the tax on your Social Security that year. However, future withdrawals from the Roth do not count as income, so this strategy may make sense if you have years ahead with lower income.

If you have nontaxable interest from municipal bonds, consider whether holding those bonds makes sense given their effect on your Social Security tax. The tax savings from the bond interest may be offset by increased tax on your Social Security.

Filing your federal tax return with Social Security income

When you file your federal tax return, you will report your Social Security benefits on Form 1040. The Social Security Administration sends you a Form SSA-1099 each January showing the total benefits you received in the previous year. Use this form to complete your tax return.

You must file a federal tax return if your combined income exceeds the threshold for your filing status, even if no tax is owed. Some people file anyway to claim refundable tax credits, such as the Earned Income Tax Credit, even if they do not owe tax.

Illinois does not require a separate state tax return for Social Security income. You may still need to file an Illinois state return if you have other income subject to state tax, such as wages or retirement account withdrawals. Check the Illinois Department of Revenue website for current filing requirements.

Frequently Asked Questions

Do I have to pay Illinois state tax on my Social Security?

No. Illinois exempts all Social Security benefits from state income tax. You will never owe Illinois state tax on your Social Security, regardless of how much you receive or what other income you have.

What if I move to another state after I start receiving Social Security?

Your federal tax obligation follows you. If you move to a state that taxes Social Security, you will owe that state's tax on your benefits starting the year you move. Some states have exemptions similar to Illinois; others tax Social Security more heavily. Check the tax rules of any state you are considering.

Can I avoid federal tax on Social Security by not working?

Not necessarily. Even if you have no wages, you may owe federal tax on Social Security if you have other income such as pensions, retirement account withdrawals, or investment income. The threshold is based on combined income, not wages alone.

What happens if I do not request withholding and do not make estimated payments?

If you owe federal tax and do not pay it through withholding or estimated payments, you will owe the tax when you file your return. The IRS may also charge penalties and interest. It is better to request withholding or make estimated payments throughout the year.

Does my spouse's Social Security count toward my combined income threshold?

No. Each person's Social Security is calculated separately for tax purposes. If you are married filing jointly, you combine your incomes to determine whether either of you owes tax, but your spouse's Social Security benefits are not added to your income — only your own benefits are included in your combined income calculation.