Work in Illinois, Live in Indiana: How Taxes Work

Reciprocity

Do Illinois and Indiana Have a Tax Reciprocity Agreement?

No. Illinois and Indiana do not have a reciprocity agreement for income tax. Illinois maintains reciprocity with Iowa, Kentucky, Michigan, and Wisconsin. Indiana maintains reciprocity with Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin. Neither state includes the other in its reciprocity arrangements.

Without reciprocity, both states claim a right to tax the same wages. Illinois taxes nonresidents on income earned within the state. Indiana taxes its residents on all income from every source. The mechanism that prevents double payment is a tax credit on your Indiana return, not an exemption from filing in Illinois.

For Indiana residents commuting to jobs anywhere in Illinois, including the Chicago suburbs or the East St. Louis area, the absence of reciprocity means filing two state returns every year. Your Illinois employer is legally required to withhold Illinois tax from your pay, and you cannot file a form to redirect that withholding to Indiana.

Filing Obligations

Which Tax Returns Do I File as an Indiana Resident Working in Illinois?

File the Illinois nonresident return first. You need the final Illinois tax figure to calculate your credit on the Indiana return. On Form IL-1040 with Schedule NR, report only your Illinois-source income. Schedule NR separates your income into the portion taxable by Illinois and the portion that is not, so the state collects tax only on wages for services performed there.

For the Illinois return, enter all income in the federal column and use Schedule NR to calculate the Illinois portion. The resulting tax flows to IL-1040, Line 12.

On your Indiana IT-40, report all income from every source. Claim the credit for Illinois taxes paid on Schedule 6, Line 5. Attach a copy of your completed Illinois return as supporting documentation.

Both returns are due April 15. Indiana grants an automatic extension when you file federal Form 4868. Illinois honors the federal extension as well.

Resident Credit

How Does Indiana's Credit Prevent Double Taxation?

Indiana taxes residents on all income. Illinois taxes nonresidents on income earned within the state. Without a credit, you would owe both states' full rates on the same wages. Indiana's Schedule 6 credit eliminates this overlap.

The credit equals the lesser of:

• The income tax you actually paid to Illinois on your IL-source wages, or
• The Indiana state tax attributable to that same income

Illinois charges a flat 4.95%. Indiana's state rate is 2.95% for tax year 2026. Because the Illinois rate exceeds Indiana's rate, the Illinois tax on your wages will almost always be larger than the Indiana tax on the same dollars. The credit covers your entire Indiana state liability on those wages, and your total state income tax equals the Illinois amount.

The credit cannot exceed the actual tax paid to Illinois. Keep your Illinois return and W-2 forms as records in case Indiana requests verification.

If you have Indiana-source income not taxed by Illinois, such as rental income from Indiana property, that income is taxed only by Indiana and does not factor into the credit calculation.

Employer Withholding

How Should My Illinois Employer Handle Withholding?

Your Illinois employer withholds Illinois income tax at the flat 4.95% rate. This is required for all employees performing services in Illinois, regardless of where they live. The employer does not withhold Indiana state tax or Indiana county tax.

Because only Illinois tax is withheld, your Indiana return may show either a balance due or a refund at the state level. Since Indiana's state rate (2.95%) is lower than Illinois' rate (4.95%), the Schedule 6 credit typically zeroes out your Indiana state tax on those wages. If the Illinois job is your only income, you may owe nothing to Indiana at the state level after the credit.

Indiana county income tax is a different story. Your Illinois employer does not withhold county tax, so the county portion often appears as a balance due on your IT-40. To avoid a large bill at filing time, consider making quarterly estimated payments to Indiana using Form ES-40. Estimated payments are due April 15, June 15, September 15, and January 15.

County Tax

Do I Owe Indiana County Income Tax on My Illinois Wages?

Yes. Indiana imposes a county income tax on residents, and your county rate applies to all of your adjusted gross income, including wages earned in Illinois. Nearly every Indiana county has adopted a county income tax, and rates vary by county.

Your county of residence as of January 1 of the tax year determines your rate for the entire year. You can find your county's current rate in Departmental Notice #1, published each year by the Indiana Department of Revenue. For the Chicago-to-Northwest-Indiana commuter corridor, common counties include Lake, Porter, and LaPorte, each with its own rate posted in that notice.

County tax is calculated on your IT-40 return. Because your Illinois employer does not withhold Indiana county tax, this amount usually appears as a balance due. This catches many cross-border workers off guard: the Schedule 6 credit covers the Indiana state tax in full, but county tax remains as a separate obligation with no offsetting credit.

Illinois does not impose a local or municipal income tax on individuals. There is no city or county income tax on the Illinois side of the commute. Your only local tax exposure is Indiana county tax at your county of residence.

Worked Example: Indiana Resident Earning $70,000 in Illinois

Single filer, all wages from Illinois employer, 2026 rates applied to gross wages before exemptions

Remote Work

What If I Work from Home in Indiana for an Illinois Employer?

Neither Illinois nor Indiana applies a convenience of the employer rule. Illinois taxes nonresidents only on income for services physically performed in the state. Days you work from your Indiana home are Indiana-source income, not Illinois-source income.

If you split your workweek between both states, allocate your wages based on the number of days worked in each location. Report only the Illinois portion on your IL-1040 Schedule NR. The Indiana portion is taxed only by Indiana, with no Illinois credit needed on those dollars.

Tracking workdays by state can reduce your total tax bill if you regularly work from home. With Illinois at 4.95% and Indiana at 2.95%, each day shifted from Illinois to Indiana lowers the effective rate on that day's wages by 2 percentage points. Keep a daily log or calendar showing where you worked, as both states may request documentation during a review.

Mid-Year Move

What If I Moved Between Illinois and Indiana During the Year?

If you changed your permanent residence between Illinois and Indiana during the year, file as a part-year resident in each state. In Illinois, use Form IL-1040 with Schedule NR to report income during your nonresident and part-year resident periods. In Indiana, use Form IT-40PNR for part-year or nonresident filing instead of the standard IT-40.

During the months you lived in Indiana and worked in Illinois, the credit mechanism described above applies. During any months you lived in Illinois, the state taxes you as a resident on all income from every source, and Indiana taxes only your Indiana-source income for that period.

Document your exact move date. Utility activation records, lease or mortgage dates, and driver's license changes serve as evidence. Both states require you to identify the date your residency changed, and each state's claim to your income depends on which days you were a resident.

Withholding Errors

What If My Employer Withheld for the Wrong State?

If your Illinois employer mistakenly withheld Indiana tax instead of Illinois tax, you will owe Illinois the full amount when you file. Submit Form IL-1040 with Schedule NR and pay the balance due. Claim the incorrectly withheld Indiana amount as a payment on your IT-40, and Indiana will refund the overpayment.

A more common problem is an employer withholding no state tax at all, usually caused by a payroll configuration error. If nothing was withheld, you owe Illinois when you file and may face underpayment penalties. Set up estimated payments for future quarters to avoid repeating the shortfall.

To prevent ongoing issues, confirm that your employer is registered to withhold Illinois income tax and that your payroll records show your Indiana home address correctly. Provide a new IL-W-4 if needed. Check your first pay stub of the year to verify that Illinois withholding appears on the state tax line.