Does Michigan Have Reciprocity With Indiana for State Taxes?

Living in one state and working in another complicates tax filing, particularly when determining where taxes are owed. Many neighboring states have agreements that help residents avoid double taxation on wages.

Existence of a Reciprocity Arrangement

Michigan and Indiana have a reciprocal tax agreement, meaning residents of one state who earn wages in the other pay income tax only to their home state. This applies solely to wages and salaries—other income, such as business profits, rental earnings, and lottery winnings, is taxed in the state where it is earned.

To benefit from this agreement, employees must submit an exemption form to their employer. Michigan residents working in Indiana should file Indiana Form WH-47 to prevent Indiana tax withholding. Indiana residents working in Michigan must submit Form MI-W4 to avoid Michigan withholding. If these forms aren’t provided, the employer may withhold taxes for the work state, requiring the employee to file for a refund later.

Steps to Determine Filing Requirements

The first step in determining tax obligations is establishing residency under Michigan and Indiana tax laws. Michigan considers individuals domiciled in the state as full-year residents unless they establish a permanent home elsewhere. Indiana follows a similar approach but also recognizes part-year and nonresident classifications based on time spent in the state during the tax year.

While wages are covered by the reciprocity agreement, other income sources may require filing in both states. A Michigan resident earning rental income from Indiana property must file an Indiana tax return for that income. Similarly, an Indiana resident with Michigan-based business income may owe Michigan taxes. Each state has specific filing thresholds, and failing to file when required can result in penalties and interest charges.

Michigan has a flat income tax rate of 4.05% in 2024, while Indiana’s rate is 3.15%. However, Indiana counties may impose additional local income taxes, which are not covered by the reciprocity agreement. If an Indiana county withholds local taxes from a Michigan resident’s paycheck, they may need to file an Indiana return to claim a refund or credit.

Possible Credits if Reciprocity Does Not Apply

When income falls outside the reciprocity agreement, taxpayers can avoid double taxation through credits for taxes paid to another state. Michigan residents who owe Indiana tax on non-wage income, such as rental earnings or business profits, can claim a credit on their Michigan return using Schedule CR (Credit for Income Tax Imposed by Government Units). This credit offsets Michigan tax liability but cannot exceed what Michigan would have taxed on the same income.

Indiana residents taxed by Michigan on nonreciprocal income can use Indiana’s credit for taxes paid to other states, claimed on Form IT-40, Schedule 6. However, Indiana only allows credits for state-level taxes, meaning local Michigan taxes, such as those imposed by Detroit or Grand Rapids, are not eligible. In such cases, taxpayers may need to file separately for refunds.

Adjusting Employer Withholdings

Ensuring the correct state income tax is withheld from each paycheck helps avoid surprises at tax time. Employees covered by a reciprocity agreement but earning additional income, such as freelance or investment income, should review their withholdings to prevent underpayment. If an employer only withholds taxes for the home state, additional estimated tax payments may be necessary.

Employers typically withhold taxes based on the work state’s regulations unless the employee provides documentation specifying otherwise. If a worker moves mid-year from a non-reciprocity state to Michigan or Indiana, updating withholding forms promptly ensures compliance with the correct state’s tax laws. Failure to do so may result in excess withholding in the previous state, requiring a refund claim, or insufficient withholding in the new state, leading to a balance due at tax time.