In certain states throughout the US, agreements have been entered into with bordering states to make tax time a little easier on those who work and live in two separate states. These arrangements are known as reciprocal tax agreements, and allow those who work outside of their home state to be exempt from paying income tax to the state in which they work on money earned in that state. Generally, in states without a reciprocal agreement, a taxpayer would have to pay taxes to both states and then file for a credit.
Those who work in Illinois are covered under a reciprocal agreement if they are a resident of Iowa, Kentucky, Michigan or Wisconsin. That means that taxpayers who live in those four states, but work in Illinois are exempt from paying taxes on their earned income in the “work” state. All you need to do is file with your employer Form WH-47, a simple exemption form which allows you to only pay taxes on the income within your “home” state.
Reciprocal agreements only apply to employment income. If you have other forms of income earned in Illinois, you’ll have to file a nonresident tax return. Some forms of non-employment income can include rental income, consultation fees, property sales, lottery winnings, and income earned from a partnership, LLC, or s-corporation.
If your employer withheld Illinois taxes by mistake, you’ll still need to file a nonresident return to get the money returned to you. Reciprical agreements simplify tax season by requiring a taxpayer to only file one state return.