Live in Indiana, Work in Illinois? Credit, County Tax, Withholding

If you live in Indiana and work in Illinois, taxes work like this: Illinois and Indiana have no reciprocal agreement, so you file a nonresident Illinois return at the state’s flat 4.95% rate, file a resident Indiana return at 2.95% for 2026, and claim an Indiana credit for the tax Illinois already took.¹²³ The credit handles the state-level double tax. What it does not handle is Indiana county income tax, which applies to your full wages with no offset, and that is where most commuters get an unexpected bill in April.

Why Both States Tax Your Wages

Indiana has reciprocal tax agreements with Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin. Illinois is not on that list.¹ Without reciprocity, both states have a legitimate claim on your paycheck: Illinois because you physically earned the money there, and Indiana because it taxes residents on all income no matter where it was earned.

An old Indiana administrative regulation (45 IAC 3.1-1-76) still names Illinois as a reciprocal state, but the Department of Revenue’s current guidance, updated December 2024, places Illinois under states with no agreement.⁴¹ Follow the current guidance: file in both states.

Your Illinois Nonresident Return

Illinois taxes income earned inside the state at a flat 4.95%, regardless of where the earner lives.² File Form IL-1040 as a nonresident and attach Schedule NR, which allocates your total income between Illinois and non-Illinois sources.⁵ Only the Illinois-sourced portion is taxed. You are required to file when your Illinois-source income produces a tax liability after your personal exemption allowance.⁶

Your Illinois employer should already be withholding Illinois tax from each paycheck using Form IL-W-4.⁷ For most daily commuters, the Illinois side of the equation is on autopilot.

Your Indiana Return and the Credit

On the Indiana side, you report all of your income on Form IT-40 as a resident. To avoid paying twice on the same wages, Indiana allows a credit for income tax paid to another state.¹ The credit equals the lesser of:

The actual Illinois tax on your Illinois-sourced income, from your completed IL-1040.
The Indiana tax that would apply to that same income if it had been earned in Indiana.

Because Illinois’s 4.95% rate is higher than Indiana’s 2.95% rate for 2026, the credit almost always gets capped at the Indiana amount.³ The credit wipes out most or all of your Indiana state tax on those wages, but the roughly two-point rate difference stays with Illinois. Neither state refunds it.

The credit uses adjusted gross income subject to tax in both states as its base. You can’t factor in a deduction one state allows and the other doesn’t; the credit is computed on income before that deduction.¹

To claim the credit, include a worksheet showing your calculation along with a copy of your completed Illinois IL-1040 and Schedule NR. Indiana specifically instructs filers not to attach W-2s as support for the credit; it wants the other state’s return.¹ Keep your records for at least three years.

Indiana County Tax: The Part With No Offset

Each of Indiana’s 92 counties sets its own income tax rate, and your rate is based on where you lived on January 1. Rates range from around 0.5% to nearly 3%. Along the Illinois border, Lake County is 1.5%, Porter County 0.5%, and LaPorte County 1.45%.

County tax applies to your full income. Indiana does allow a county-level credit, but only for local income tax paid to a locality in another state.¹ Illinois doesn’t impose local income tax on wages, so you almost certainly have no local tax to credit. Your county tax bill runs in full, on top of what Illinois already collected.

For someone earning $80,000 in Lake County, that’s $1,200 in county tax by itself. This is the surprise that catches commuters. The state credit handles double taxation at the state level. Nothing handles it at the county level.

Days You Work From Home in Indiana

If your schedule is hybrid, days you work from your Indiana home are not subject to Illinois tax. Illinois taxes nonresidents only on income earned while physically in the state, and your Schedule NR allocation should reflect any days worked elsewhere.

More Indiana workdays mean less Illinois tax and more Indiana state tax before the credit, and the two adjust roughly in proportion, so the state-level total often nets out. County tax still runs on your full income regardless of where you worked.

Keep a real-time log of where you physically worked each day. Calendar entries, badge records, or a spreadsheet updated weekly are far more credible than something reconstructed at filing time if Illinois questions your allocation.

Withholding and Estimated Payments

The Illinois withholding is usually taken care of by your employer. The Indiana side, especially the county portion, often isn’t. You can file an Indiana Form WH-4 with your employer to request Indiana state and county withholding, but many Illinois employers aren’t set up to process out-of-state withholding. When they can’t, you cover the gap with quarterly estimated payments to Indiana using Form ES-40.⁸

The quarterly due dates are April 15, June 15, September 15, and January 15 of the following year.

If your combined withholding and estimated payments fall short, Indiana charges a 10% penalty on the underpayment for each period.³ To stay out of penalty territory, your payments for the year need to hit one of two safe harbors:⁸

90% of your current-year total tax liability, state and county combined, or
100% of your prior-year total tax liability.

If your federal adjusted gross income tops $150,000 ($75,000 if married filing separately), the prior-year threshold rises to 110%.⁸ Because the credit largely erases your Indiana state tax, your remaining liability is mostly county tax. Estimate it early, set up quarterly payments, and don’t wait until you file.

Filing Jointly When One Spouse Commutes

When both spouses are full-year Indiana residents and only one works in Illinois, you file a joint Indiana IT-40 and claim the credit for taxes paid to Illinois based on the commuting spouse’s income alone. The credit only covers income actually taxed by both states; you can’t apply one spouse’s Illinois tax against Indiana tax on the other spouse’s Indiana wages.¹

If one spouse is a part-year Indiana resident or a nonresident, file Indiana Form IT-40PNR instead of IT-40, even on a joint return.¹ Attach the Illinois return and your credit worksheet either way.

If You Lose the Illinois Job

Unemployment doesn’t follow tax rules. If you’re laid off, file your claim with Illinois, because Illinois is where your employer paid into unemployment insurance. The process is the same as for Illinois residents.⁹

One extra step: Illinois law requires benefit recipients to register with the employment services system in their state of residence, so as an Indiana resident you must register with Indiana’s workforce development system while collecting Illinois benefits. Skipping that registration can put your benefits at risk.⁹

1
Indiana Department of Revenue. Income Tax Information Bulletin 28
2
Illinois Department of Revenue. Income Tax Rates
3
Indiana Department of Revenue. Rates, Fees and Penalties
4
Legal Information Institute. 45 IAC 3.1-1-76 Reciprocity
5
Illinois Department of Revenue. Form IL-1040 Individual Income Tax Return
6
Illinois Department of Revenue. Filing Requirements
7
Illinois Department of Revenue. 2026 Withholding Payroll Tax Forms
8
Indiana Department of Revenue. Estimated Payments
9
Illinois Department of Employment Security. Out of State Claimants