Illinois Considers Taxing Retirement Income

Illinois is a rare state that does not tax retirement income. No politician has openly called for starting to, but it's an option, as state officials look around for new revenue to help resolve the six-month old budget impasse.

The nonpartisan Civic Federation recommends a tax on retirement income as a way to stabilize the state's finances, especially as the number of senior citizens living in Illinois is projected to grow.

But that also means the number of elderly voters will rise.

The AARP's Bob Gallo says that besides considering the wrath of older voters, legislators should also consider the impact that lifting the retirement income tax break would have.

“Millions of Illinoisans - especially older and retired individuals - are living on fixed incomes, or struggling with the rising cost of essential necessities,” said Gallo. "They know it would have a major detrimental impact on their household budgets, on their ability to prepare for and enjoy a secure retirement, or even on their ability to stay retired.”

Illinois could opt to tax only retirement income above a certain level, such as $50,000. Advocates of that route argue seniors who don't have enough money to retire still have to pay income taxes, while those who are well off enough to stop working, don't.