How to Claim the Indiana Credit for Taxes Paid to Other States
Understand the process for claiming Indiana's tax credit for out-of-state income to ensure you don't overpay on your state tax return.
When income is earned in one state by a resident of another, the risk of double taxation arises. To address this, Indiana offers a credit for taxes paid to other states. This provision allows Indiana residents to reduce their Indiana tax liability by the amount of income tax they have already paid to another state on the same earnings. It directly impacts the final tax bill for many individuals who live in Indiana but work or have business interests elsewhere. Understanding how this credit functions is a practical step for taxpayers to ensure they are not overpaying their total state tax obligations.
Determining Eligibility for the Credit
An Indiana resident who earns income from a source in another state and pays income tax to that state is eligible. This applies to various forms of income, including wages, salaries, and profits from a business that operates outside of Indiana. However, Indiana has special agreements with certain states that change how taxes are handled.
If you work in a state with a reciprocal agreement, you should have Indiana state tax withheld from your pay and would not claim this credit. If tax was withheld by the reciprocal state in error, you must file for a refund from that state, not Indiana. These states are:
- Kentucky
- Michigan
- Ohio
- Pennsylvania
- Wisconsin
Conversely, if you earn income in certain other locations, you must claim a credit on that state’s nonresident tax return, not on your Indiana return. This credit is for income earned in states not covered by these specific agreements. These locations include:
- Arizona
- California
- Oregon
- Washington D.C.
Part-year Indiana residents may also qualify for the credit for income earned from another state during the period the individual was an Indiana resident. The credit is available for state and local income taxes paid to another jurisdiction. Other types of taxes, such as property taxes on an out-of-state home, sales taxes, or corporate income taxes, are not eligible for this credit. The tax must be an income-based tax for which the individual is personally liable.
Required Information and Documentation
Before beginning the calculation, taxpayers must have precise figures for the total income earned and taxed in the other state, as well as the exact amount of state and local income tax paid to that jurisdiction.
The primary documentation required is a complete and signed copy of the tax return filed with the other state. This document serves as evidence that tax was legally required and paid to another jurisdiction on the out-of-state income. Withholding statements or other proofs of payment are not sufficient on their own without the accompanying state tax return.
This information is compiled and reported on Indiana’s Schedule 6, Credit for Taxes Paid to Other States. This form guides taxpayers through reporting the necessary figures. You will transfer the income and tax data from your other state’s return directly onto the initial lines of Schedule 6 to begin the calculation.
Calculating the Credit Amount
The final credit amount is not simply the total tax paid to the other state; it is subject to a three-part limitation. The allowable credit is the lesser of three specific amounts.
The first limitation is the actual amount of state and local income tax you were liable for and paid to the other state. This figure is taken directly from the other state’s tax return. The second limitation is the amount of Indiana state income tax due on the income earned from the other state, which is found by multiplying the out-of-state income by the Indiana income tax rate.
The third limitation is the total Indiana state tax liability for the year, as reported on the main Form IT-40. For example, imagine an Indiana resident earned $20,000 in another state, paid $800 in tax to that state, and their total Indiana tax liability is $2,500. If Indiana’s tax on that $20,000 is calculated to be $600, the credit would be limited to $600, as it is the lowest of the three amounts ($800, $600, and $2,500).
How to Claim the Credit on Your Indiana Tax Return
Once the credit amount has been calculated on Schedule 6, it is reported on the primary Indiana tax return. For full-year residents, this means transferring the final credit amount from Schedule 6 to the designated line on Form IT-40. Part-year and non-residents will use Form IT-40PNR and its corresponding Schedule G to report the credit.
If filing electronically, tax preparation software will prompt you to upload a PDF copy of the completed tax return from the other state. This digital attachment is transmitted along with the Indiana e-filed return and serves as the necessary proof of payment.
For those filing a paper return, a copy of the completed Schedule 6 must be attached to the Form IT-40 or IT-40PNR. Behind Schedule 6, you must also attach a full copy of the tax return filed with the other state.