Winamac, IN asked in Tax Law for Indiana

Q: College daughter's permanent address is IN; she earned income in IL. How does she get credit for taxes paid in IL?

Although my daughter's permanent address is in IN, she lived at college and worked in IL all year. Her W-2 forms indicate IL state taxes withheld and she is filing an IL non-resident tax form. She did not earn any money in IN. Why is she being taxed by IN?

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1 Lawyer Answer
James L. Arrasmith
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  • Tax Law Lawyer
  • Sacramento, CA

A: Based on the information provided, it seems your daughter's tax situation is as follows:

1. She is a permanent resident of Indiana (IN) for tax purposes.

2. She earned income in Illinois (IL) while attending college there.

3. Her W-2 forms show that Illinois state taxes were withheld from her paychecks.

As a resident of Indiana, your daughter is required to file an Indiana resident tax return and report all of her income, regardless of where it was earned. This is because Indiana taxes its residents on their worldwide income.

However, to avoid double taxation, Indiana allows residents to claim a credit for taxes paid to other states. Here's what your daughter should do:

1. File an IL non-resident tax return (Form IL-1040) to report her Illinois income and pay any additional taxes owed or claim a refund if she overpaid.

2. File an IN resident tax return (Form IT-40) and report all of her income, including the income earned in Illinois.

3. On her Indiana tax return, she can claim a credit for taxes paid to Illinois using Schedule 2: Credit for Taxes Paid to Other States. This credit will offset some or all of the Indiana taxes owed on her Illinois income.

By claiming the credit for taxes paid to Illinois, your daughter should be able to avoid double taxation on her Illinois income. She will effectively pay taxes to Illinois on the income earned there, and Indiana will give her a credit for those taxes paid.

It's important to note that the credit for taxes paid to other states is limited to the amount of Indiana tax that would have been imposed on the same income. In other words, if the Illinois tax rate is higher than the Indiana tax rate, she may still owe some Indiana taxes on her Illinois income.

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