If I Live in Illinois and Work in Indiana, Who Do I Pay Taxes To?

For those who reside in Illinois and commute to Indiana for work, their tax obligations are governed by specific agreements and rules established between the two states. This arrangement dictates where state income taxes are paid and which forms must be filed. Understanding these cross-border tax laws is required for ensuring compliance and proper payment.

The Illinois-Indiana Reciprocity Agreement

A tax reciprocity agreement is a pact between two states that allows residents of one state who work in the other to only pay income tax to their state of residence. Illinois and Indiana have such an agreement, which simplifies the tax situation for many commuters. Under this arrangement, an Illinois resident who earns wages, salaries, tips, or commissions in Indiana is only required to pay Illinois state income tax on that income, preventing double taxation.

This agreement specifically applies to employee compensation. It does not extend to other types of income, such as earnings from self-employment or income from property located in Indiana. For the agreement to be effective, the employee must take specific steps with their Indiana employer to prevent incorrect tax withholding.

Required Withholding Forms for Your Employer

To ensure your Indiana employer does not withhold Indiana state income tax from your pay, you must provide them with Indiana’s Form WH-47, Certificate of Residence. This form serves as an affidavit to your employer, certifying that you are a resident of a reciprocal state and therefore exempt from Indiana state income tax withholding on your wages. The Form WH-47 should be completed and given directly to your employer for their records; it is not sent to the Indiana Department of Revenue.

Concurrently, you should ensure your employer is correctly withholding Illinois income tax. You will need to complete an Illinois Form IL-W-4, Employee’s and other Payee’s Illinois Withholding Allowance Certificate, so your employer withholds the appropriate amount for your home state.

How to File Your State Tax Returns

When tax season arrives, and assuming you have correctly set up your withholding, the filing process is straightforward. As an Illinois resident, you are required to file an Illinois Form IL-1040, the Individual Income Tax Return. On this return, you must report all income you earned, including the wages from your Indiana job, as Illinois taxes the worldwide income of its residents.

Because of the reciprocity agreement, if your only income from Indiana was from wages and your employer did not withhold Indiana state tax, you do not need to file an Indiana state income tax return. Your entire state income tax liability on those wages will be calculated and paid to Illinois.

Addressing Indiana County-Level Taxes

A detail of the Illinois-Indiana arrangement is that the reciprocity agreement does not apply to local-level taxes. This means that while you are exempt from Indiana state income tax on your wages, you are still liable for any applicable Indiana county income taxes. These taxes, known as Local Income Taxes (LIT), are assessed based on the county where your principal work activities occurred as of January 1st of the tax year.

To pay this liability, you must file an Indiana nonresident tax return, specifically Form IT-40PNR, Part-Year Resident or Nonresident Individual Income Tax Return. The purpose of filing this return is to calculate and pay the county tax due. You will report your Indiana wages on this form to determine the county tax base, but you will not owe any Indiana state income tax on that same income.

Correcting Improper Indiana Tax Withholding

An Indiana employer may mistakenly withhold Indiana state income tax from an Illinois resident’s pay, especially if Form WH-47 was not submitted. You cannot simply let Indiana keep the tax and ignore your Illinois obligation, as the reciprocity agreement dictates that the tax is owed to Illinois.

First, you must file an Indiana nonresident return, Form IT-40PNR, to claim a full refund of the state taxes that were incorrectly withheld. On this return, you will report your Indiana wages and the amount of state tax withheld, showing that you owe zero state tax due to your Illinois residency. This will result in a refund of all Indiana state taxes paid.

Second, you must still file your Illinois resident return, Form IL-1040, and report all of your income, including the Indiana wages. You will then pay the full amount of Illinois tax calculated on that income. Do not claim a “credit for taxes paid to another state” on your Illinois return for the Indiana taxes. Because you are receiving a full refund of the Indiana taxes, they were not technically “paid” to Indiana, and claiming a credit would be improper.