I'm a permanent U.S. resident living in Illinois and I just started receiving my UK State Pension -- does Illinois tax that pension income?

Plain-English summary

A permanent U.S. resident who has lived in Illinois since immigrating in 1987 began receiving a foreign state pension (the ruling's title identifies it as a UK pension) in January 2023, alongside U.S. Social Security benefits earned in parallel under the U.S.-UK Social Security Agreement. The taxpayer had already confirmed with the IRS/Treasury materials that, at the federal level, the tax treaty treats this foreign pension the same way U.S. Social Security is treated. But there's no separate tax treaty between foreign countries and individual U.S. states, so the taxpayer asked the Illinois Department of Revenue directly: does Illinois tax this foreign pension?

The Department did not give a firm yes-or-no answer. Instead, it explained that the answer depends on exactly what type of pension the taxpayer receives -- and that wasn't clear from the letter.

Two different Illinois subtraction provisions could apply, depending on the pension's character:

• IITA Section 203(a)(2)(F) allows a subtraction for amounts includible in federal income under IRC Sections 402(a), 402(c), 403(a), 403(b), 406(a), 407(a), and 408 -- provisions covering distributions from U.S.-created exempt employee trusts, certain annuities, employee benefit plans covering overseas affiliate employees, and individual retirement accounts -- as well as distributions under any governmental or disability retirement plan, or retirement payments to retired partners excluded from self-employment earnings under IRC Section 1402.
• IITA Section 203(a)(2)(L) allows a subtraction for Social Security benefits and railroad retirement benefits included in federal income under IRC Sections 72(r) and 86.

The treaty context the Department cited. The Department quoted the Treasury's Technical Explanation of the 2001 U.S.-UK tax treaty, which draws a distinction between (1) private pensions and annuities, which are generally taxable exclusively by the beneficiary's country of residence, and (2) social security benefits (and equivalent U.S. Tier 1 Railroad Retirement benefits), which are also taxable exclusively by the country of residence, but under a separate treaty paragraph. Both categories point to residence-country (i.e., U.S., and by extension Illinois) taxation at the federal treaty level -- the treaty explanation didn't resolve the Illinois state-subtraction question, which turns instead on which Internal Revenue Code section captures the specific type of pension.

Bottom line: it depends on the pension's character, and the Department couldn't tell from the letter. The Department told the taxpayer that "[d]epending on the type of pension you receive, which is not discernable from your letter, either the provisions of IITA Section 203(a)(2)(F) or Section 203(a)(2)(L) may apply" -- and pointed the taxpayer to IDOR Publication 120 (Retirement Income) for further guidance, without resolving which subtraction actually covers this taxpayer's UK pension.

What this means for you

If you receive a foreign state pension while living in Illinois

Whether your foreign pension qualifies for an Illinois subtraction from base income depends on how that pension is structured and which Internal Revenue Code provision captures it federally -- not simply on the fact that it's foreign or that a treaty exists. A foreign pension that functions like Social Security (i.e., captured by IRC Sections 72(r) or 86) may qualify under IITA Section 203(a)(2)(L); a foreign pension that functions more like a U.S. employer-sponsored plan, annuity, or retirement account distribution (captured by IRC Sections 402, 403, 406, 407, or 408) may instead qualify under IITA Section 203(a)(2)(F).

Immigrants and expats with dual pension entitlements

If you contributed to both a foreign pension/social-insurance scheme and U.S. Social Security (as allowed under a bilateral Social Security Agreement), don't assume both streams get identical Illinois tax treatment automatically -- each needs to be evaluated against the specific IRC subsection it falls under federally before you can determine the Illinois subtraction that applies.

Accountants and tax professionals

Because the Department couldn't classify the taxpayer's pension from the letter alone, be prepared to analyze the foreign pension plan's actual legal structure (is it more like a governmental/employer retirement plan, an annuity, or a social-insurance/social-security-equivalent benefit?) before advising a client which IITA 203(a)(2) subtraction, if any, applies. Consider IDOR Publication 120 (Retirement Income) as a starting reference, and note that a fact-specific case like this could be a candidate for a binding Private Letter Ruling request under 2 Ill. Adm. Code 1200.110 if certainty is needed.

Common questions

Q: Does Illinois tax foreign pensions, like a UK State Pension, received by an Illinois resident?
A: The Department didn't give a blanket answer. Whether the pension qualifies for an Illinois subtraction from base income depends on which type of income it is treated as under the Internal Revenue Code.

Q: What Illinois subtraction applies if my foreign pension is treated like Social Security?
A: IITA Section 203(a)(2)(L), which covers Social Security benefits and railroad retirement benefits included in federal income under IRC Sections 72(r) and 86.

Q: What Illinois subtraction applies if my foreign pension is treated like a U.S. retirement plan or annuity distribution?
A: IITA Section 203(a)(2)(F), which covers amounts under IRC Sections 402(a), 402(c), 403(a), 403(b), 406(a), 407(a), and 408, as well as governmental or disability retirement plan distributions.

Q: Did the tax treaty between the U.S. and the UK settle this question?
A: Not for Illinois purposes. The treaty's Technical Explanation addresses which country has the right to tax the pension at the federal/treaty level (generally the country of residence), but it doesn't determine which Illinois state subtraction modification applies -- that turns on the Internal Revenue Code classification of the specific pension.

Q: Why didn't the Department just answer the question directly?
A: Because the type of pension wasn't discernible from the taxpayer's letter, and the taxpayer had requested a Private Letter Ruling but the Department determined the inquiry required a General Information Letter instead, which is not binding and only points to relevant authority rather than applying it to specific facts.

Citations and references

Statutes, regulations, and treaty materials:

• 35 ILCS 5/203(a)(2)(F) (subtraction for IRC Sections 402(a), 402(c), 403(a), 403(b), 406(a), 407(a), 408 amounts; governmental/disability retirement plans)
• 35 ILCS 5/203(a)(2)(L) (subtraction for Social Security and railroad retirement benefits under IRC Sections 72(r) and 86)
• IRC Sections 401(a), 402, 403(a), 403(b), 406, 407, 408 (employee trusts, annuities, overseas-affiliate plans, IRAs)
• IRC Sections 72(r), 86 (Social Security/railroad retirement taxation)
• IRC Section 1402 (self-employment earnings; retired-partner payment exclusion)
• U.S.-UK Income Tax Treaty (signed July 24, 2001) and Treasury Department Technical Explanation
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letters)
• IDOR Publication 120, Retirement Income (referenced resource)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2023.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2023/it23-0015-gil.pdf

Original ruling text

IT-23-0015-GIL 08/03/2023 PENSIONS – FOREIGN PENSIONS
Some UK pensions governed by U.S tax treaty with the United Kingdom may
qualify for the subtraction modification found in IITA Section 203(a)(2)(L). (This
is a GIL.)

August 3, 2023
NAME
ADDRESS
Dear NAME:
This letter is in response to your letter dated June 20, 2023, in which you
requested information. The Department issues two types of letter rulings. Private Letter
Rulings (“PLRs”) are issued by the Department in response to specific taxpayer
inquiries concerning the application of a tax statute or rule to a particular fact situation.
A PLR is binding on the Department, but only as to the taxpayer who is the subject of
the request for ruling and only to the extent the facts recited in the PLR are correct and
complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General
Information Letter (“GIL”) is to direct taxpayers to Department regulations or other
sources of information regarding the topic about which they have inquired. A GIL is not
a statement of Department policy and is not binding on the Department. See 2 Ill. Adm.
Code 1200.120. You may access our website at www.tax.illinois.gov to review
regulations, letter rulings and other types of information relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we
respond with a GIL. In your letter you have stated and made inquiry as follows:
I have been in touch with the Taxpayer Assistance Division of the Illinois
Department of Revenue seeking guidance on whether my COUNTRY State Pension
is taxed by the State of Illinois. The advice I received from that office was to request
a private letter ruling from your office and this is my formal request for such a letter.
I have reviewed the section of the Illinois Administrative Code pertaining to
Private Letter Rulings and have attached to this letter any information at my
disposal pertaining to my request. If anything further is needed I will, at your
request, try to provide it.
Reason for Request
I am a citizen of the COUNTRY. I have been a permanent resident of the US
since 1987. I have lived at my current address in Illinois for the entirety of my
residence in the US. While living in the US, I continued to pay contributions to the
COUNTRY State Pension Scheme and qualified for the full COUNTRY retirement
pension. In parallel with this, I also contributed to Social Security here in the US and

NAME
Page 2
August 3, 2023
also qualified for Social Security here, as is allowed by the Social Security
Agreement between the COUNTRY and the USA.
I began receiving my COUNTRY pension on January 5, 2023. The Tax Treaty
between the COUNTRY and the USA dictates that my COUNTRY pension is
taxable at the Federal level in the same way that US Social Security is taxable at
the Federal level. However, there is no such tax treaty between the COUNTRY and
individual states in the US. My research here has produced only the generalized
statement that Illinois is one of the states that does not tax retirement pensions,
but I have not been able to find a definitive ruling that says Illinois either does or
does not tax state retirement pensions, paid from the COUNTRY.
For clarification on this, I contacted your Taxpayer Assistance Division who,
in turn, referred me to you. I am, therefore requesting a Private Letter Ruling on
this matter for the current (2023) tax year and subsequent tax years pending any
changes to Illinois law, or to the expiration of the validity of such a ruling.
This is the first time I have submitted this request and, to the best of my
knowledge the Legal Department has not issued a prior ruling on this matter. Nor
is this mater the subject of an audit or any pending litigation.
DEPARTMENT’S RESPONSE:
Section 203(a)(2)(F) provides the following deduction in the computation of an
individual’s Illinois base 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.

NAME
Page 3
August 3, 2023
•
•

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.

Section 203(a)(2)(L) provides the following deduction in the computation of an
individual’s Illinois base income:
For taxable years ending after December 31, 1983, an amount equal to all
social security benefits and railroad retirement benefits included in such
total pursuant to Sections 72(r) and 86 of the Internal Revenue Code;
The Department of the Treasury Technical Explanation of the Convention
Between the United States of America and the United Kingdom for the Avoidance of
Double Taxation (“Technical Explanation”) signed in London on July 24, 2001, states, in
part:
This article deals with the taxation of private (i.e., non-government service)
pensions and annuities, social security benefits, alimony and child support
payments.
Paragraph 1 provides as a general rule, in subparagraph (a), that the
State of residence of the beneficial owner has the exclusive right to tax
pensions and other similar remuneration. For this purpose, a payment is
treated as a pension or other similar remuneration if it is a payment under
a pension scheme, as defined in sub-paragraph (o) of paragraph 1 of
Article 3 (General Definitions). While the term "pension" generally would
include both periodic and lump-sum payments, paragraph 2 of the Article
provides specific rules to deal with lump-sum payments, so they are not
subject to the general rule of paragraph 1.

Paragraph 3 provides for exclusive residence-country taxation of social
security benefits. Like the prior Convention, but unlike the U.S. Model, the
Convention provides that payments made by one of the Contracting
States under the provisions of its social security or similar legislation to a
resident of the other Contracting State will be taxable only in the other
Contracting State. This paragraph applies to social security beneficiaries,
whether they have contributed to the system as private-sector or
government employees. The phrase “similar legislation” is intended to
refer to United States Tier 1 Railroad Retirement benefits.
Your letter indicates that you are a permanent resident of the United States and
began receiving a UK pension on January 5, 2023. Depending on the type of pension

NAME
Page 4
August 3, 2023
you receive, which is not discernable from your letter, either the provisions of IITA
Section 203(a)(2)(F) or Section 203(a)(2)(L) may apply.
I hope this information is helpful. You may also reference Publication 120,
Retirement Income, available on the IDOR website at www.tax.illinois.gov. 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).

Very truly yours,

Brian Fliflet
Deputy General Counsel
BF:rkn