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.
First, create the Illinois resident return. If the taxpayer is eligible for the reciprocal agreement then the credit for taxes paid to another state cannot be claimed.
If the other state is Iowa:
- Add or Edit Iowa Nonresident Return
- Nonresident & Part Year Resident Income Allocation
- Gross Income Taxable to Iowa
- Wages, Salaries, Tips, etc
- Adjustments to State Wages - Enter the amount as a negative.
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
- Were you a Full-year Resident of a Reciprocal State? - Answer Yes and Select Illinois from the list of states
- Residency Information - Complete the questions indicting the taxpayer is a resident of a reciprocal state.
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 Nonresident Michigan Return
- Nonresident & Part Year Income Allocation
- Income Allocation
- Wages and Salaries
- Adjustments to State Wages - Enter the wages for Michigan as a negative.
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
- Legal Residence Questionnaire - Enter Taxpayer/Spouse Status and State of Residence (if not completed when adding the state)
- Wisconsin Income
- Total Income
- Wages, Salaries, tips ect
- State Wages - Enter the amount of Wisconsin Income as a negative amount
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: