Was a pension earned from a private foreign employer excludable from Illinois income?

Plain-English summary

The pension from the private foreign employer did not qualify for Illinois's retirement-income subtraction. The payment was included in federal income. Illinois then allowed only the addition and subtraction modifications expressly authorized by Section 203.

Section 203(a)(2)(F) covered specified federal retirement provisions, governmental retirement or disability plans, and certain retired-partner payments. IDOR concluded that none appeared to apply to this private employer's foreign plan.

What this means for you

Do not assume that every federally taxable pension is subtractable in Illinois. Confirm the plan's precise federal qualification and whether it falls within an expressly listed Illinois category.

Common questions

Q: Did the pension qualify merely because the recipient was retired?
A: No.

Q: Was the ruling based on the plan being foreign?
A: It was based on the foreign private-employer plan not appearing to fit the retirement provisions Section 203(a)(2)(F) listed.

Citations and references

• 35 ILCS 5/203(a)(2)(F), (h)
• I.R.C. §§ 401(a), 402, 403, 406–408, 1402

Subject

Subtraction Modifications – Pensions

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2013.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2013/it-13-0003.pdf

Original ruling text

IT 13-0003-GIL 03/26/2013 SUBTRACTION MODIFICATIONS – PENSIONS
General Information Letter: Pensions received from overseas employment by foreign
corporations most likely do not qualify for subtraction from adjusted gross income.
March 26, 2013
Dear:
This is in response to your letter dated March 11, 2013, in which you request a letter ruling. The
nature of your request and the information you have provided require that we respond with a General
Information Letter, which is designed to provide general information, is not a statement of Department
policy and is not binding on the Department. See 86 Ill. Adm. Code 1200.120(b) and (c), which may
be found on the Department's web site at www. tax.illinois.gov.
In your letter you have stated the following:
This letter requests a “Private Letter Ruling” concerning the taxability for Illinois tax
purposes of a pension paid by a foreign entity to an Illinois citizen.
Taxpayers are husband and wife, citizens of the United States, Citizens of the State of
Illinois, and resided in COUNTY Illinois for the entire year in issue. Husband and wife
file joint federal and State of Illinois returns and both are more than 65 years old.
Husband is currently employed as an accountant auditor and wife is retired. Husband
receives and reports wage income and social security income. Wife reports social
security income. She reports income from two pensions on lines 16(a) and 16(b) of the
taxpayers’ 1040 federal income tax return. (Taxpayers also have a small amount of
interest income from two bank accounts.)
Taxpayer Wife’s pension income is made up of two components. The first component is
a small pension from a U.S. corporation. It is included in taxpayer’s federal taxable
income and is excluded from Illinois income. It is not in issue.
Taxpayer Wife’s second pension is paid by “the COMPANY” which is “part of the
DEPARTMENT” in the COUNTRY.
Taxpayer wife was employed in COUNTRY for approximately thirteen (13) years. One
of the elements of her remuneration was a pension. In COUNTRY, her employer, a
nongovernmental entity, paid her pension over to the “COMPANY” as is the custom in
that country. When taxpayer wife reached retirement age “The COMPANY” began
payment of her weekly pension which is currently paid at the rate of AMOUNT per
week. The weekly pension is regularly adjusted for changes in the cost of living.
The instructions for IL-1040 for line 5 describe the rules for adjustments to “base
income” where pensions are backed out of Illinois taxable income. Foreign pensions
are not included in the descriptions provided all be it references are made to
“Publication 120.”
Publication 120 answers the question, “What retirement income may I subtract on Form
IL-1040, Line 5 . . . “ on page 2. The instruction provided is, “You may subtract the
amount of any federally taxed portion (not the gross amount) included in your Form IL-

IT 13-0003-GIL
March 26, 2013
Page 2
1040, Line 1 that you received from > a qualified employee benefit plan including 401(k)
plans as reported on your U.S. 1040, Line 16b Note> A qualified employee benefit plan
is defined in IRC Sections 402 through 408. (Sections 402 through 408 are the U.S. tax
framework for which pensions are deductible by an employer. Section 61 is the section
in the IRC under which pensions are includable in federal income.)
The question that you are asked to rule on is the pension paid by a foreign entity to a
United States citizen that is includable in federal income excludable for Illinois income
tax purposes.
Response
Under Section 203(a) of the Illinois Income Tax Act (35 ILCS 5/203), the computation of an
individual's "net income" taxed by Illinois begins with the taxpayer's federal adjusted gross income, as
properly computed for the taxable year. Various addition and subtraction modifications are then
made, and the resulting "base income" is then allocated and apportioned to Illinois. Section 203(h)
provides that no modification may be made to adjusted gross income unless expressly provided in
Section 203.
Section 203(a)(2)(F) allows an individual to subtract from his or her adjusted gross income:
An amount equal to all amounts included in such total pursuant to the provisions of
Sections 402(a), 402(c), 403(a), 403(b), 406(a), 407(a), and 408 of the Internal
Revenue Code, or included in such total as distributions under the provisions of any
retirement or disability plan for employees of any governmental agency or unit, or
retirement payments to retired partners, which payments are excluded in computing net
earnings from self employment by Section 1402 of the Internal Revenue Code and
regulations adopted pursuant thereto.
Section 402 of the Internal Revenue Code deals with distributions from employee trusts exempt under
Section 401(a) of the Internal Revenue Code, which provides an exemption for certain employee
trusts “created or organized in the United States.”
Section 403(a) of the Internal Revenue Code deals with annuities described in Section 404(a)(2) of
the Internal Revenue Code, which describes certain annuities purchased by employee trusts exempt
under Section 401(a) of the Internal Revenue Code.
Section 403(b) of the Internal Revenue Code deals with annuities for employees of exempt
organizations.
Sections 406 and 407 of the Internal Revenue Code deal with employee benefit plans under Section
401 that cover overseas employees of affiliates of the employer that created the plan.
Section 408 of the Internal Revenue Code deals with individual retirement accounts.
None of these provisions would appear to apply to a retirement plan of a private employer in
COUNTRY, and the pension income would therefore not qualify for subtraction under Section
203(a)(2)(F).

IT 13-0003-GIL
March 26, 2013
Page 3

As stated above, this is a general information letter which does not constitute a statement of policy
that applies, interprets or prescribes the tax laws, and it is not binding on the Department. If you are
not under audit and you wish to obtain a binding Private Letter Ruling regarding your factual situation,
please submit all of the information set out in items 1 through 8 of Section 1200.110(b). If you have
any further questions, you may contact me at (217) 782-7055.
Sincerely,

Paul S. Caselton
Deputy General Counsel – Income Tax