If I am a resident of Indiana but work in Michigan, and I am getting a state refund in Michigan, why do I owe almost the same amount in Indiana?

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February 28, 2022
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LenaH

You will owe taxes in your resident state if you work in another state and only withhold taxes in your nonresident state. If you live in Indiana and work in Michigan, your employer should be withholding Indiana tax, not Michigan tax.

Michigan and Indiana have a reciprocal agreement. Generally, this means that all salaries, wages, tips, and commissions earned in Michigan by an Indiana resident must be reported as if they were earned in Indiana. However, if taxes have been withheld or paid to Michigan, then a nonresident return would have to be filed for a refund of state tax for Michigan and a resident return would have to be filed to pay tax to your resident state of Indiana. Because they have a reciprocal agreement, you will get a refund of taxes withheld from Michigan and be taxed on it in Indiana.

Please submit MI-W4 to your employer so that Indiana tax is withheld from your pay, rather than Michigan tax.

For more information, please see What is a state reciprocal agreement?

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Hal_Al

Employee

You don't get out of paying income tax to your home state, by working in another state.

The general rule is: your report ALL your income on your home state return, even the income earned out of state. You file a non-resident state return for the state you worked in and pay tax to that state. Your home state will give you a credit, or partial credit, for what you paid the non-resident state.

In the case of reciprocal states (IN & MI), it works a little differently.

IN has a reciprocal agreement, on wages, with some neighboring states. No MI state taxes are withheld or due and you do not normally need to file a MI return. But IN will tax you on your MI income.

If MI taxes are mistakenly withheld, you then have to file a MI return to get a refund. IN will not give you a credit. You should ask your employer to stop withholding so you don't have to file a MI return every year.

However the reciprocity agreement does not apply to MI city taxes. You are not required to file a local city return, but you are also not entitled to a refund of the city withholding (box19 on your W-2), unless there was an error in the amount.

Most IN counties (but not the state) allow a credit, or partial credit for tax paid to a MI city. That will come up in the IN state interview. (For details, see:

https://ttlc.intuit.com/community/state-taxes/discussion/i-see-no-separate-question-for-school-taxes...