Illinois has income tax reciprocity agreements with four states: Iowa, Kentucky, Michigan, and Wisconsin. If you live in one of those states and work in Illinois, your wages are exempt from Illinois’s 4.95% income tax, and Illinois residents who commute to jobs in those four states get the same treatment in reverse. To actually get the exemption, you have to file the right form with your employer. Otherwise Illinois tax comes out of every paycheck, and you have to chase it back later.
The Four Reciprocal States
Iowa, Kentucky, Michigan, and Wisconsin are the only states with reciprocity agreements with Illinois. The Director of Revenue can enter agreements with any state that taxes income and offers Illinois residents the same treatment, but as of now those four are the entire list.1Cornell Law School. Illinois Admin Code Title 86, 100.7090 – Reciprocal Agreement (IITA Section 701)
Two neighbors are worth naming because commuters assume they’re on the list and they aren’t: Indiana and Missouri. If you live in Indiana or Missouri and work in Illinois, Illinois taxes your wages. You handle the double-tax problem through a credit on your home-state return, not through reciprocity.
What the Agreement Actually Covers
Reciprocity applies to employee compensation only: wages, salaries, tips, and commissions. Other income from Illinois sources is not protected. If you live in Wisconsin and earn self-employment income, rental income, or business profits tied to Illinois, that income can still be taxable in Illinois.2Illinois Department of Revenue. Filing Requirements
Gambling and lottery winnings are the other common surprise. Illinois taxes gambling winnings earned inside the state no matter where the winner lives, and that includes sports wagering.3Illinois Department of Revenue. IL-1040 Schedule NR Instructions An Iowa resident who wins at an Illinois casino owes Illinois income tax on those winnings and has to file an Illinois return to report them, reciprocity or not.
How to Stop Illinois Withholding on Your Paycheck
File Form IL-W-5-NR (Employee’s Statement of Nonresidence in Illinois) with your employer. The form certifies that you live in Iowa, Kentucky, Michigan, or Wisconsin and instructs the employer to stop withholding Illinois income tax. Your employer should then withhold for your home state instead.4Illinois Department of Revenue. Illinois Withholding Tax Form IL-W-5-NR
You sign the form under penalties of perjury, so the declaration matters. Don’t file it if you’ve actually established residency in Illinois. Illinois looks at where you keep your permanent home, not just where you sleep most nights. Registering a car here, getting an Illinois driver’s license, or registering to vote here can all establish Illinois residency and undo any nonresidency claim you make on the form.5Illinois Department of Revenue. First-Time Filer Residency Information
If Illinois Tax Was Already Withheld
Say you started a new job, forgot the IL-W-5-NR, and Illinois tax has been coming out of your check all year. You’re not stuck with it. File an Illinois Form IL-1040 with Schedule NR (the nonresident schedule) and claim a refund of the incorrectly withheld tax.6Illinois Department of Revenue. 2025 IL-1040 Instructions
This is the most common reciprocity slip, and skipping the refund filing is costly. Your home state will still tax the same wages, so if you don’t recover the Illinois amount, you’ve effectively paid two states on one paycheck.
Illinois Residents Commuting Out of State
The exemption runs the other direction too. Live in Illinois, work in Iowa, Kentucky, Michigan, or Wisconsin, and your wages are exempt from that state’s income tax. You owe Illinois only, at the flat 4.95% rate.7Illinois Department of Revenue. Income Tax Rates Each reciprocal state has its own nonresidency certificate, similar to Illinois’s IL-W-5-NR, that you file with your out-of-state employer.
One catch on Kentucky in particular: the reciprocity agreement covers state income tax, not local. Some Kentucky cities levy their own income tax on workers within city limits, and the state-level agreement doesn’t shield you from those. If a local government in a reciprocal state taxes your wages, you can claim a credit for the local tax on your Illinois return using Schedule CR.8Illinois Department of Revenue. 2025 IL-1040 Schedule CR Instructions
When There’s No Reciprocity: The Schedule CR Credit
Illinois residents working in a non-reciprocal state (Indiana, Missouri, or any state farther afield) will generally owe income tax there on those wages. To keep from being taxed twice on the same income, claim a credit on Schedule CR of your Illinois return for the income taxes you paid to the other state.9Illinois Department of Revenue. 2025 IL-1040 Schedule CR Instructions
The credit covers state income taxes, local income taxes, and taxes paid to the District of Columbia or U.S. territories. A few limits apply:
- You must actually have filed the required return and paid the tax to the other jurisdiction.
- Federal taxes and foreign taxes don’t count; the credit is only for state and local income taxes within the U.S. and its territories.
- Interest and penalty charges are excluded even when tied to an income tax.
Schedule CR caps the credit so you never get back more than what Illinois would have charged on the same income. Because Illinois’s 4.95% flat rate sits below the top brackets in many neighboring states, the credit often wipes out the Illinois liability on the out-of-state wages.
Penalties for Getting It Wrong
The IL-W-5-NR is signed under penalties of perjury. Claiming nonresidency when you actually live in Illinois is a false declaration and can trigger both tax penalties and potential criminal liability.4Illinois Department of Revenue. Illinois Withholding Tax Form IL-W-5-NR If your residency has genuinely shifted to Illinois, pull the form and let Illinois withholding resume.
How Long to Keep Your Records
The Illinois Department of Revenue generally has three years from the date you filed your return to issue a notice of deficiency, which is the window a reciprocity claim can be challenged.10Cornell Law School. Illinois Admin Code Title 86, 100.9320 – Limitations on Notices of Deficiency (IITA Section 905) Two situations stretch that window:
- Six years if you omitted more than 25% of your base income, or if you didn’t file at all but had reasonable cause (measured from the return’s due date).
- No limit if the return was fraudulent or the failure to file was deliberate.
Practically, keep your IL-W-5-NR, proof of home-state residency, and copies of your state returns for at least three years. If you have income beyond straight wages, keep them for six.