An Illinois resident who was employed in Iowa, Kentucky, Michigan, or Wisconsin, must file Form IL-1040 and include all compensation received from an employer in these states. Compensation paid to Illinois residents working in these states is taxable to Illinois. While a resident of Illinois, the taxpayer is covered by a reciprocal agreement between the reciprocal state and Illinois and is not to be taxed by the other state on for wages.
If the taxpayers employer withheld tax for the other state or the taxpayer paid tax to these states on their compensation, the taxpayer must claim a refund from that state. The taxpayer may not claim a credit on Schedule CR for that tax withheld by the employer. The taxpayer must file the appropriate forms with that state to receive a refund of tax withheld in error.
If the taxpayer is eligible for the reciprocal agreement then the credit for taxes paid to another state cannot be claimed.
To remove the credit for taxes paid from the Illinois return, from the main menu of the Illinois return select;
- Illinois Resident Return
- Credits
- Credit for Taxes Paid to Another State
- Are you claiming credit for taxes paid to (Iowa, Kentucky, Michigan or Wisconsin). Select Yes for the correct state.
If the other state is Iowa:
- Federal Section
- Income
- Wages and Salaries
- Edit the W-2 - remove the Iowa income from Box 16 of the W-2.
Click Continue to save the changes. Disregard the warning about the withholdings. To claim exempt from Iowa withholdings, complete form 44-016 and file it with the taxpayers employer.
If the other state is Kentucky:
- Add or Edit Kentucky Nonresident return
- Basic Information
- Residency Information - Select your residency status as Reciprocal State Resident. Select IL as the state and move down to Form 740-NP-R Nonresident Reciprocal State Return. Complete one for the taxpayer and one for the spouse (if applicable).
To claim exempt from Kentucky withholdings, complete form 42A809 and file it with the taxpayers employer.
If the other state is Michigan:
- Add or Edit Michigan Nonresident return
- Residents of Reciprocal States - Enter the Michigan wages from the W-2 as a negative number.
To claim exempt from Michigan withholdings, complete form MI-W4 and file it with the taxpayers employer.
If the other state is Wisconsin:
- Add or Edit Wisconsin Nonresident return
- Basic Information
- Select Your Resident State
- Return to Wisconsin Nonresident Main menu
- Legal Residence Questionnaire - Select Yes to complete the questionnaire.
- Residency and Non-residency question - Complete this section as instructed.
- Return to the Federal Section
- Income
- Edit the W-2 with Wisconsin wages and remove the amount in Box 16.
Disregard the warning about the withholdings amount. To claim exempt from Wisconsin withholdings, complete form W-220 and file it with the taxpayers employer.
The reciprocal agreements do not prohibit subdivisions of these states from imposing a tax on the taxpayers compensation. For example, if the taxpayer was subject to tax by a city in Kentucky while they were an Illinois resident, they may claim a credit for that local tax.
In addition, because of differences in state laws, the taxpayer may be considered a resident by one of these states and required to pay their income taxes, even though the taxpayer is an Illinois resident under Illinois law. In that case, the taxpayer may claim a credit for the tax paid.
Additional Information:
Illinois State Tax Information
Illinois Resident Return Instructions
ProWeb: Which States does Michigan have a Reciprocal Agreement with?