Illinois Income Tax Agreement With Bordering States

Get the Facts on Illinois Tax Reciprocity

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Quite often, residents in one state might work in a neighboring state. To avoid having residents pay taxes in two states, the two neighboring states will form a reciprocity agreement. These agreements concern income taxes for those who work in one state but live in another. Under reciprocity, residents only pay income taxes to their home state, regardless of where they work.

Residents of states bordering Illinois can take advantage of such a reciprocal agreement.

Reciprocal Agreements

Many states across the U.S. have reciprocal agreements, sometimes called tax reciprocity, with bordering states. Normally, anyone earning income in a particular state must pay taxes to that state. This can result in workers being taxed twice if they actually live somewhere else.

For example, if you once lived in a state where you worked (and earned income there) and then worked again in what is now your home state, you'd need to file returns for total income earned in your home state.

Some states allow taxpayers to take a credit for income taxes paid to another state, and some states have reciprocal agreements. Either way, the end result is that the worker is taxed only in the state where they live.

Employers always withhold the local state taxes for their employees, but they're not required to withhold taxes for the state where the worker lives. This can result in out-of-state workers owing money, instead of receiving a refund, when tax time rolls around. Because of this situation, many workers make voluntary estimated quarterly payments to their own states to be on the safe side.

States with Illinois Tax Reciprocity

Illinois has a reciprocal tax agreement with four bordering states:

  • Iowa
  • Kentucky
  • Michigan
  • Wisconsin

If you cross borders between Illinois and another state for work, you should talk to your employer about your withholding situation so you can ensure you're not surprised at tax time.

Living in Illinois and Working in Another State

An Illinois resident who works in Iowa, Kentucky, Michigan, or Wisconsin is only required to pay income tax to Illinois. These bordering states do not tax the wages of Illinois residents working in their jurisdictions.

You'll need to file Form IL-1040 at tax time. You'll report the income you earned in these reciprocal states to be taxed by Illinois. If the state you work in taxes you, you'll have to file the right form with that state to claim a refund.

You're entitled to a refund if you're an Illinois resident and have had taxes withheld from your paycheck for any of these four bordering states. You cannot, however, take a credit for taxes withheld from these states on your Illinois return.

Living in Another State and Working in Illinois

You are not subject to Illinois income tax on wages, salaries, tips, or commissions received from employers in Illinois if you are a resident of Iowa, Kentucky, Michigan, or Wisconsin. However, this does not apply to any other type of income received in Illinois, such as lottery winnings.

Income outside of your normal wages, salary, tips, or commissions is taxable in Illinois, regardless of residency.

What To Do if You Live In a State With Reciprocity

If you live in a state that has reciprocity with Illinois, there are a few steps you should take to make sure your records are up-to-date for tax time. The forms you need to fill out will depend on your situation, whether you're living in a state with a reciprocal agreement, and whether you've already had Illinois taxes withheld from your paycheck.

File Tax Form IL-W-5NR

You should file Form IL-W-5NR, "Employee's Statement of Nonresidence in Illinois," with your employer to certify that you live in one of the four states with reciprocity. This form will let your employer know to stop the tax withholding.

Moving? File Form IL-W-5

If you happen to move out of your current state and take up residence in Illinois, you must file Form IL-W-5, "Certificate of Residence in Illinois," with your employer. This form lets your employer know to withhold Illinois taxes.

Need a Refund? File Form IL-1040 and Schedule NR

If you had Illinois tax withheld from your paycheck when it shouldn't have been, you can claim a refund. To claim it, you'll need to file an Illinois tax return, which is ​Form IL-1040, and include Schedule NR for your status as a non-resident. You'll also need to include Form W-2c or an official letter from your employer confirming the error.

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