How to Claim Indiana’s Credit for Taxes Paid to Other States

An Indiana resident who pays income tax to another state on the same earnings Indiana is taxing can claim the Indiana credit for taxes paid to other states, a dollar-for-dollar reduction of Indiana tax equal to the lesser of what the other state charged on that income or what Indiana itself would charge on it.¹ It is not a refund, it cannot exceed your Indiana liability for the year, and several situations that look like they should qualify do not: reciprocal states, reverse-credit states, local taxes, and most passive income.

Who Can Claim It

Full-year Indiana residents are the main users of the credit because Indiana taxes their income from all sources, wherever earned. They claim it on Form IT-40.²

Part-year residents can claim it too, but only for out-of-state income earned during the months they lived in Indiana. They file Form IT-40PNR and use Schedule A to split earnings between the resident and nonresident portions of the year.³ Income received while you lived outside Indiana generally falls outside the calculation because Indiana wasn’t taxing it.

Nonresidents cannot claim the credit. Indiana taxes them only on income sourced within the state, so there’s no double claim to resolve. The other state must also actually impose an income tax on the earnings; wages from a no-income-tax state give you no basis for a credit.

Reciprocal States Where the Credit Does Not Apply

Indiana has reciprocal wage-tax agreements with five neighbors: Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin.⁴ Wages, salaries, tips, and commissions an Indiana resident earns in any of those states are taxed only by Indiana. The reciprocal state should not tax them at all.

If your employer in a reciprocal state withheld that state’s tax anyway, the Indiana credit will not fix it. You have to file a return with the reciprocal state and request a refund of the withholding.⁵ To stop the withholding going forward, give your employer a Certificate of Residence, Form WH-47, which establishes your Indiana residency and exempts you from the other state’s withholding.⁶

Two limits matter here. Reciprocity covers only wages and similar compensation, so business income, rental income, or other non-wage earnings sourced to a reciprocal state fall back under the standard credit rules and may require a return in that state. And reciprocity does not cover local taxes; your employer must still withhold any applicable Indiana county tax regardless of where the work happens.⁶

Reverse-Credit States: Arizona, Oregon, and Washington, D.C.

Indiana will not grant a credit for tax paid to a state that itself offers a credit to Indiana residents. Per current Department of Revenue guidance, those jurisdictions are Arizona, Oregon, and Washington, D.C.⁷

If you earned income in one of them, file a nonresident return there and claim the credit against that state’s tax for the Indiana tax you paid on the same income.⁸ Nothing will appear on your Indiana return for those three jurisdictions, no matter how much was withheld. This catches people out when they see Arizona or Oregon withholding on a W-2 or K-1 and assume Indiana will offset it.

How to Calculate the Credit

The credit equals the smaller of two figures: the income tax you actually paid to the other state on the out-of-state income, or the Indiana tax attributable to that same income.¹ And it can never exceed your total Indiana state tax liability for the year.⁹

To find the Indiana tax attributable to the out-of-state income, take the ratio of that income to your total federal AGI and apply it to your Indiana tax before credits. Because Indiana uses a flat 2.95% rate for the 2026 tax year, that ratio produces the same result as multiplying the out-of-state income directly by 2.95%.¹⁰

A worked example. Total AGI is $100,000, and $25,000 was earned and taxed in Georgia. Indiana tax before credits is $2,950. The Indiana tax attributable to the Georgia income is $25,000 ÷ $100,000 × $2,950, or $737.50. If Georgia charged $1,100 on that income, the Indiana credit is capped at $737.50, and the $362.50 difference is not recovered.

That gap is common. Most states bordering Indiana or drawing Indiana commuters tax income at rates above 2.95%, so the credit routinely lands at the Indiana figure and leaves part of the other state’s tax uncovered. If you earned income in more than one state, run the calculation separately for each. Credits cannot be pooled, and excess credit from one state cannot cover a shortfall from another.

What the Credit Does Not Cover

The credit is narrower than it looks. Several categories fall outside it:

Local taxes paid to other jurisdictions. City income taxes, occupational taxes, and out-of-state county taxes cannot offset your Indiana state tax. A separate credit against your Indiana county tax (the local income tax, or LIT) is available for out-of-state local taxes paid. State-level and county-level credits stay in their own lanes; neither reduces the other.¹¹¹
Non-income taxes. Property taxes, corporate income taxes, franchise fees, and unincorporated business taxes paid to another state are not eligible.⁷
Passive and intangible income. Indiana generally sources dividends, interest, and capital gains from non-business assets to your state of residence, so even if another state taxed a brokerage account, Indiana may not treat that income as sourced outside Indiana. The credit typically requires wages earned in the other state or business income subject to apportionment there.

Pass-Through Entity Owners: Use the PTET Path

If you own an interest in an S-corporation or partnership and your K-1 shows entity-level tax paid to another state, do not enter that amount on the standard credit for taxes paid to other states. Indiana authorized its own elective pass-through entity tax (PTET) retroactive to tax years beginning on or after January 1, 2022, and provides a separate credit for comparable taxes another state imposed on the entity.¹²

The entity-level credit is reported on Schedule IN-OCC using credit code 811, and the total flows to Schedule 6 or Schedule G on your individual return.¹³ These rules are newer and more detailed than the individual credit; work them through the PTET pathway.

What to File and What to Attach

The credit is entered in the credits section of your IT-40 or IT-40PNR.¹⁴ For each state, you enter the state’s name, the AGI reported there, and the tax paid; the proration formula sets the allowable amount.

Documentation makes or breaks the claim. Gather these before you file:

A complete copy of every other state’s return you filed for the year, with all schedules and attachments. The Department of Revenue uses these to verify the income reported and the tax actually paid. Without them, the credit gets rejected or delayed.
Your W-2s and 1099s showing the source of the out-of-state earnings and any withholding.
Your federal return, since federal AGI is the denominator in the proration formula.

Commercial tax software handles the math once the other state’s return data is entered and lets you upload a PDF of that return as an attachment. On a paper return, put the IT-40 or IT-40PNR on top, then the Indiana schedules, then the full copies of each other state’s return, and mail to the address in the form instructions.

Fixing the Credit Later

If you filed your Indiana return before the other state’s return was finished, or the other state later adjusted your liability, use Form IT-40X to claim or correct the credit.¹⁵ You have three years from the due date of the original return, including extensions, to file for a refund.

On the IT-40X, put the original figures in Column A, the change in Column B, and the corrected totals in Column C. Check the box for adding or changing a credit, and include a written explanation. Enclose the other state’s return with the amended filing. Processing generally runs about 20 weeks.¹⁵

1
Cornell Law School. 45 IAC 3.1-1-74 – Credit for Other State Income Taxes
2
Indiana Department of Revenue. IT-40 Full Year Resident Individual Income Tax Booklet
3
Indiana Department of Revenue. IT-40PNR Part Year and Full Year Nonresident Individual Income Tax Booklet
4
Indiana Department of Revenue. Income Tax Information Bulletin 28
5
Cornell Law School. 45 IAC 3.1-1-76 – Reciprocity
6
Indiana Department of Revenue. Income Tax Information Bulletin 33 – Withholding Requirements for Nonresident Employees
7
Indiana Department of Revenue. Credits
8
Cornell Law School. 45 IAC 3.1-1-75 – Nonresident Credit From Other States
9
Indiana General Assembly. Indiana Code Title 6 Article 3 Chapter 3 Section 6-3-3-3 – Taxes Paid to Other States
10
Indiana Department of Revenue. Indiana Department of Revenue Tax Chapter for the 2025 Filing Year
11
Cornell Law School. 45 IAC 3.1-4-10 – Credit for Taxes Paid to Out-of-State Local Jurisdictions
12
Indiana Department of Revenue. Pass Through Entity Tax
13
State Forms Online Catalog – IN.gov. Schedule IN-OCC – Other Certified Credits
14
Indiana Department of Revenue. DOR Current Year Individual Tax Forms
15
IN.gov. Indiana Amended Individual Income Tax Return Form IT-40X Instructions