Illinois Reciprocal Agreement: Understanding the Basics

The Illinois Reciprocal Agreement, also known as the “reciprocity agreement,” is a tax agreement between Illinois and a group of other states that allows people who work in Illinois but live in one of the other participating states to pay state taxes only in their home state, rather than in Illinois.

Currently, there are five states that have reciprocal agreements with Illinois: Iowa, Kentucky, Michigan, Missouri, and Wisconsin. Residents of these states who work in Illinois are exempted from paying Illinois state income tax, while Illinois residents who work in one of these states are exempted from paying state income tax in that state.

The agreement is designed to simplify tax filings for people who work across state lines and to reduce the burden of double taxation. Without the agreement, people who live in one state but work in another would typically have to file state tax returns in both states, potentially paying taxes twice on the same income.

To qualify for the reciprocal agreement, employees must fill out a non-resident exemption form with their employer and submit it to their payroll department. This form verifies that the employee is a resident of one of the five participating states and that they will not be subject to Illinois income tax withholding.

It’s important to note that the reciprocal agreement applies only to state income taxes. Other taxes, such as local income taxes or sales taxes, may still apply and must be paid in the state where they apply.

The reciprocal agreement is a significant benefit for those who commute across state lines for work. However, it’s important to be aware of the potential limitations and requirements to ensure that you are taking full advantage of the program.

For example, if you work in Illinois but also earn income from other states, you may still be subject to Illinois income tax on that additional income. Additionally, if you move to a different state mid-year, you may be subject to different tax laws and may need to file multiple tax returns.

In conclusion, the Illinois Reciprocal Agreement can be a valuable benefit for those who work in Illinois but live in one of the five participating states. However, it’s important to understand the requirements and limitations of the program to ensure that you are accurately reporting and paying your taxes. As always, it’s advisable to consult a tax professional for guidance on your specific situation.