An Illinois resident who was employed in Iowa, Kentucky, Michigan, or Wisconsin, must file Form IL-1040 and include all compensation you received from an employer in these states. Compensation paid to Illinois residents working in these states is taxable to Illinois. While you were a resident of Illinois, you are covered by a reciprocal agreement between the reciprocal state and Illinois and are not to be taxed by the other state on your wages.
If your employer withheld tax for the other state or you paid tax to these states on your compensation, you must claim a refund from that state. You may not claim a credit on Schedule CR for that tax withheld by the employer. You must file the appropriate forms with that state to receive a refund of tax withheld in error.
The credit for taxes paid to another state is automatically calculated in your account when you add a Nonresident state return to your already created Resident Illinois return. If you qualify for the reciprocal agreement, you will need to remove the automatic calculation in the program. You can do so by logging into your account and go to the State Section > 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. The Illinois return will no longer calculate the credit. You will now need to go to the Nonresident return and claim a refund of your withholdings (if any) for the reciprocal state.
If the other state is Iowa, go to the Federal Section > Income > Wages and Salaries > Edit the W-2 with Iowa income and remove the amount in 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 your employer.
If the other state is Kentucky, go to the State Section > Kentucky Nonresident return > Basic Information. Scroll to the bottom portion of the screen-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 your employer.
If the other state is Michigan, go to the State Section > 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 your employer.
If the other state is Wisconsin:
- Go to the State Section > Wisconsin Nonresident return > Basic Information > Select Your Resident State > Save.
- Continue to the Legal Residence Questionnaire. Select Yes to complete the questionnaire. Click Begin for the Residency and Non-residency question
- Complete this section as instructed.
- Go to the Federal Section, then select Income and Edit the W-2 with Wisconsin wages and remove the amount in Box 16. Click Continue to save the information. Disregard the warning about the withholdings amount. To claim exempt from Wisconsin withholdings, complete form W-220 and file it with your employer.
NOTE: The nonresident returns will refund all or most of the taxes withheld. The resident return will calculate an amount owed (usually).
The reciprocal agreements do not prohibit subdivisions of these states from imposing a tax on your compensation. For example, if you were subject to tax by a city in Kentucky while you were an Illinois resident, you may claim a credit for that local tax.
In addition, because of differences in state laws, you may be considered a resident by one of these states and required to pay their income taxes, even though you are an Illinois resident under Illinois law. In that case, you may claim a credit for the tax paid.