When you live in one state but work in another, where do you pay income tax? The good news is you don’t owe double tax to both states.
If you live in Illinois and work in Wisconsin, you pay taxes only to your home state.
Illinois and Wisconsin Reciprocity
When you live in Illinois but work in Wisconsin, you are subject to the states’ reciprocity agreements on this issue, so don’t worry about filing two returns. In a reciprocity agreement, two states permit residents to pay tax only where they live and not where they work. Illinois has a reciprocity agreement not only with Wisconsin, but Illinois tax reciprocity also extends to Kentucky, Michigan and Iowa. That means the same structure would hold true if you live in Wisconsin but work in Illinois rather than the other way around.
Wisconsin, meanwhile, has reciprocity agreements not just with Illinois but also with Indiana, Kentucky and Michigan. Wisconsin will not tax your wages if you’re an Illinois resident, and if you did have Wisconsin state income taxes withheld, you should receive a refund.
You must file the “Nonresident Employee’s Withholding Reciprocity Declaration” form with your Wisconsin employer to ensure state income taxes are not withheld. If you qualify for this exemption and find your employer has withheld Wisconsin income taxes, you must file Form 1NPR, the Wisconsin income tax return and request the refund. Make sure to file this form during the regular tax filing season.
Supreme Court Decision
In 2015, the U.S. Supreme Court ruled in Comptroller of the Treasury of Maryland v. Wynne that two states can’t tax the same income. While Maryland was the state in question in this decision, the court’s ruling applies to all states.
Keep in mind that reciprocity only involves salaries, wages, tips and commissions. It does not apply to other sources of income from Wisconsin, such as rents, property sales or gambling or lottery winnings. You will owe taxes to Wisconsin on this type of income.
Tax on a Paycheck in Illinois
Illinois charges a flat tax, so figuring out how much you will owe in state income tax is relatively simple. Prior to July 2017, the flat tax rate was 3.75 percent, but as of July 2017 it rose to 4.95 percent. The state has an exemption allowance of $2,000, but that does not apply to those whose adjusted gross income on their federal tax return exceeds $250,000 for single filers or $500,000 for married couples filing jointly.
- The CPA Journal: Supreme Court Rules that Two States May Not Tax the Same Income
- Thomson Reuters: State-by-State Reciprocity Agreements
- Wisconsin Department of Revenue: Individual Income Tax Working in Another State
- Illinois Revenue: Witholding Payroll
- Illinois Department of Revenue: Summary of Illinois Income Tax and Sales Tax Changes from P.A. 100-0022
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Financial Advisor, Sapling, nj.com and The Nest.