Does Illinois Have Reciprocity With Wisconsin for State Taxes?

Living in one state while working in another can complicate tax filing. Some neighboring states have agreements that simplify tax obligations, but Illinois and Wisconsin do not. Residents who work across state lines must understand their tax responsibilities to avoid overpaying or filing incorrectly.

Reciprocity Status

Illinois and Wisconsin do not have a reciprocity agreement, meaning income tax is owed to the state where wages are earned. Unlike states with reciprocity agreements that allow workers to avoid withholding in the work state, Illinois and Wisconsin require employers to withhold taxes based on where work is performed.

A Wisconsin resident working in Illinois will have Illinois income tax withheld, while an Illinois resident working in Wisconsin will have Wisconsin tax withheld. Because there is no reciprocity, individuals must file a nonresident return in the state where they work and a resident return in their home state.

To prevent double taxation, both states offer credits for taxes paid to the other. These credits help offset tax liability but are subject to limitations.

Filing as a Wisconsin Resident with Illinois Income

Wisconsin residents working in Illinois must file tax returns in both states. Illinois taxes income based on where it is earned, requiring a Wisconsin resident to file an Illinois nonresident return (Form IL-1040 and Schedule NR) and pay Illinois tax. Illinois has a flat income tax rate of 4.95% in 2024.

Wisconsin residents must also report all income, including Illinois wages, on a Wisconsin resident return (Form 1). Wisconsin’s tax rates are progressive, ranging from 3.5% to 7.65% in 2024.

To avoid double taxation, Wisconsin residents can claim a credit for taxes paid to Illinois on Schedule OS of their Wisconsin return. This credit is limited to the amount of Wisconsin tax that would have been owed on the Illinois income. If Illinois tax paid exceeds Wisconsin tax liability, the excess cannot be refunded or carried forward.

Filing as an Illinois Resident with Wisconsin Income

Illinois residents working in Wisconsin must also file tax returns in both states. Illinois taxes residents on all income, regardless of where it is earned, so wages from Wisconsin employment must be reported on an Illinois return. Wisconsin taxes income earned within its borders, requiring a nonresident Wisconsin return.

Wisconsin’s progressive tax system means the amount owed depends on total taxable income. In some cases, Wisconsin tax liability may exceed what Illinois would impose on the same income. Illinois allows residents to claim a credit for taxes paid to Wisconsin using Schedule CR, but the credit cannot exceed the Illinois tax that would have been due on the Wisconsin earnings. If Wisconsin tax liability is higher, the excess is not refundable or applicable to future tax years.

Withholding Requirements in Cross-State Employment

Employers must withhold state income tax based on where an employee physically works. An Illinois employer paying a Wisconsin resident must withhold Illinois tax, while a Wisconsin employer paying an Illinois resident must withhold Wisconsin tax.

Employers must also comply with each state’s registration and reporting requirements. Illinois employers with Wisconsin residents on payroll may need to register with the Wisconsin Department of Revenue if they have a business presence there. Similarly, Wisconsin employers with Illinois workers must follow Illinois Department of Revenue regulations. Proper registration ensures that withheld taxes are remitted correctly and wage reports, such as Illinois Form IL-941 or Wisconsin Form WT-6, are submitted on time.

Credits for Taxes Paid to Another State

Both Illinois and Wisconsin offer credits to residents who pay income tax to the other state to prevent double taxation, but these credits have limitations.

Illinois residents working in Wisconsin can claim a credit on their Illinois return using Schedule CR. The credit is limited to the lesser of the Wisconsin tax paid or the Illinois tax that would have been owed on the same income. If Wisconsin tax liability is higher, Illinois will not refund or carry forward the excess. Taxpayers must attach a copy of their Wisconsin return and proof of tax payments, such as a W-2 or tax transcript, to claim the credit. Errors in documentation can lead to processing delays or denials.

Wisconsin residents earning income in Illinois must use Schedule OS to claim a credit on their Wisconsin return. The credit ensures Wisconsin residents do not pay more in total state taxes than they would have if all income were earned in Wisconsin. However, since Illinois has a flat tax rate, Wisconsin residents in higher tax brackets may still owe additional Wisconsin tax beyond what was credited. Proper documentation, including a copy of the Illinois return and proof of tax payments, is required to substantiate the claim. Failure to provide these documents can result in the credit being disallowed, leading to unexpected tax liabilities.