Could an Illinois resident claim the other-state tax credit for Kentucky county income tax withheld from wages?

Plain-English summary

The Kentucky county wage tax qualified for the Illinois credit. Illinois taxed its resident's Kentucky earnings, while the reciprocal agreement prevented Kentucky state income tax on those wages. The agreement did not prohibit a Kentucky city or county from taxing them.

Because the county tax was local rather than Kentucky state tax, it could fall within Section 601(b)(3). IDOR reviewed the taxpayer's Kentucky W-2 information and agreed that the local withholding was creditable and sufficiently documented.

Kentucky state income tax withheld from reciprocal wages was different: the resident had to seek a Kentucky refund and could not claim that amount on Illinois Schedule CR.

What this means for you

Separate state and local withholding. Attach the payor statement showing both the tax withheld and income subject to it, and account for any refund or reduction.

Common questions

Q: Did reciprocity block the county tax credit?
A: No.

Q: Could Kentucky state withholding on wages be claimed instead of refunded?
A: No.

Citations and references

• 35 ILCS 5/601(b)(3)
• 35 ILCS 5/301(a), 302(b), 203(a)
• 86 Ill. Adm. Code 100.2197(g)

Subject

Credit – Foreign Tax

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2012.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2012/it-12-0020.pdf

Original ruling text

IT 12-0020-GIL 07/31/2012 CREDIT – FOREIGN TAX
General Information Letter: Resident is allowed a credit for local income taxes paid to
Kentucky municipalities.
July 31, 2012
Dear:
This is in response to your letter dated February 26, 2012 in which you state the following:
I am writing to request clarification as to why my credit for taxes paid to another state (line 17IL 1040) has been denied. I was initially informed of this on December 6 through a Return
Correction Notice.
My first response to this was to call the Illinois Department of Revenue to ask why. I am sorry
that I did not get the name of the person that I spoke to at the time, but he stated that it was
because of the reciprocal agreement between Illinois and Kentucky. I pointed out that I was
taking a credit for local taxes, not State, as there is no reciprocal agreement between Illinois
and Kentucky at the local level. He agreed with my assessment and simply instructed me to
return the second page of that notice with my explanation. I did so by certified letter on
December 28, within the 30 day limit, and provided supporting documentation, including
another copy of my Kentucky W2 stating the local income tax withheld and a pay stub
documenting what the tax was (i.e., COUNTY Tax). To date, I have not received a response
to this explanation.
However, I did receive a Taxpayer Notification Response dated February 15, but it appears
that it completely ignored my previous response. It simply states again that line 17 of my 2010
Form IL 1040 has been changed from $927.00 to $0.00 with no further explanation. I am
enclosing copies of both notices with this letter.
BACKGROUND
For most of 2010, I worked in CITY, Kentucky commuting there weekly and staying in a hotel
Monday through Thursday nights. Therefore, most of my income for that tax year was earned
in Kentucky. There was a minimal portion earned in Illinois, but that had to do with work
performed at an Illinois firm in 2009 and not paid out until 2010. Both income sources are
documented on my Schedule CR.
My Kentucky employer initially started withholding Kentucky state taxes when I began working
there, but I pointed out to them the reciprocal agreement and that by all possible means tests I
was domiciled in Illinois (i.e., property taxes, vehicle registration, voter registration, utility bills,
etc). I also provided them with a Certificate of Non-Residence and they promptly stopped
withholding state income tax. However, they continued to withhold the local COUNTY tax,
which amounted to $927.48 for the year. I did not take a credit on my Schedule CR for the
state taxes initially withhold in error. Rather, I applied for a refund through Kentucky’s
Department of Revenue.
CONCLUSION
Your Publication 111 does little to clarify what is already in the Schedule CR General
instruction. The instructions state specifically with respect to local taxes:

IT 12-0020-GIL
July 31, 2012
Page 2

The reciprocal agreements do not prohibit subdivisions of these states from imposing a
tax on your compensation. For example, if you were subject to a tax by a city in
Kentucky while you were an Illinois resident, you may claim a credit for that local tax.
The instructions also state that:
To qualify for this credit, a tax must be deductible as state and local income taxes paid
on your federal Schedule A, Itemized Deductions, whether or not you actually claimed
the deduction.
In fact, I recently amended my Federal return (copy enclosed) to specifically include this tax as
I overlooked it when filing my first return. The IRS has already allowed the deduction and
processed my refund. However, I do not need to amend my IL state return because the
adjustment did not affect my Federal AGI. It merely increased the amount of my itemized
deductions.
To confirm that I completed the Schedule CR correctly, I took it to my local H&R Block office
and spoke to the manager/senior tax consultant who was familiar with this schedule. He
stated that normally Schedule CR’s are not filed for reciprocal states, but in the case of
withholding for Kentucky local taxes, my schedule was correct. The credit flows from the
amount entered on line 1 column B. The instructions state:
Write the amount of wages not shown as Illinois wages on the state copy of the W-2
form(s) you received. Do not include wages taxed by another state if they are also
shown as Illinois wages. Also, do not include wages you received for working in Iowa,
Michigan or Wisconsin while you were an Illinois resident or any wages you received for
working in Kentucky unless you paid a Kentucky city or county tax on these wages.
As I paid Kentucky’s COUNTY tax on these wages, I used the Kentucky wages to compute my
credit.
To summarize, I believe that I am being taxed twice for the same income earned and that by
all accounts from all of your publications and instructions, I am entitled to this credit. If I am
missing something, please clarify my error. In addition, I would greatly appreciate it if you
would do so in a timely manner as I am currently being assessed additional interest due to
these delays in responding appropriately to my responses. In fact, I received a Final Notice of
Tax Due with the Taxpayer Notification Response that has a due date of March 16, 2012.
According to the Department of Revenue (“Department”) regulations, the Department may issue only
two types of letter rulings: Private Letter Rulings (“PLR”) and General Information Letters (“GIL”).
The regulations explaining these two types of rulings issued by the Department can be found in 2
Ill.Admin.Code §1200, or on the website http://www.tax.illinois.gov/LegalInformation/regs/part1200.
Due to the nature of your inquiry and the information presented in your letter, we are required to
respond with a GIL. GILs are designed to provide background information on specific topics. GILs,
however, are not binding on the Department.

IT 12-0020-GIL
July 31, 2012
Page 3
Under the Illinois Income Tax Act, a resident of Illinois is taxable on income earned in Kentucky.
Specifically, Section 301(a) of the Illinois Income Tax Act (35 ILCS 5/301) provides:
(a) Residents. All items of income or deduction which were taken into account in the
computation of base income for the taxable year by a resident shall be allocated to this
State.
Under Section 203(a) of the Illinois Income Tax Act (35 ILCS 5/203), “base income” is the amount
reported on Line 9 of the Form IL-1040, and is equal to your “adjusted gross income” as properly
reported on your federal income tax return and on Line 1 of your Form IL-1040, after taking into
account the modifications reported on Lines 2 through 8.
In order to prevent an Illinois resident from paying state income tax twice on the same income,
Section 601(b)(3) of the Illinois Income tax Act (35 ILCS 5/601) allows a credit for taxes paid to
another state on income taxed by both that state and by Illinois. The statutory language is as follows:
(3) Foreign tax. The aggregate amount of tax which is imposed upon or measured by income
and which is paid by a resident for a taxable year to another state or states on income which is
also subject to the tax imposed by subsections 201(a) and (b) of this Act shall be credited
against the tax imposed by subsections 201(a) and (b) otherwise due under this Act for such
taxable year. … For taxable years ending on or after December 31, 2009, the credit provided
under this paragraph for tax paid to other states shall not exceed that amount which bears the
same ratio to the tax imposed by subsections 201(a) and (b) otherwise due under this Act as
the amount of the taxpayer’s base income that would be allocated or apportioned to other
states if all other states had adopted the provisions in Article 3 of this Act bears to the
taxpayer’s total base income subject to tax by this State for the taxpayer year. The credit
provided by this paragraph shall not be allowed if any creditable tax was deducted in
determining the base income for the taxable year. Any person claiming such credit shall attach
a statement in support thereof and shall notify the Director of any refund or reductions in the
amount of tax claimed as a credit hereunder all in such manner and at such time as the
Department shall by regulations prescribe.
Section 302(b) of the Illinois Income Tax Act (35 ILCS 5/302) provides:
(b) Reciprocal exemption. The Director may enter into an agreement with the taxing
authorities of any state which imposes a tax on or measured by income to provide that
compensation paid in such state to residents of this State shall be exempt from such tax; in
such case, any compensation paid in this State to residents of such state shall not be
allocated to this State.
Under that authority, the States of Illinois and Kentucky entered into a “reciprocal agreement”
effective January 28, 1971, pursuant to which neither state taxes, or requires withholding from, wages
earned in the state by a resident of the other state.
The instructions to the Schedule CR under “General Information” expressly provide
If you earned wages, salaries, tips, or other employee compensation from an employer in
Iowa, Kentucky, Michigan, or Wisconsin while you were a resident of Illinois, you are covered

IT 12-0020-GIL
July 31, 2012
Page 4
by a reciprocal agreement between that state and Illinois and are not taxed by that state on
your compensation. However, you may be taxed on other income.
If your employer withheld tax or you paid tax to these states on your compensation, you must
claim a refund from that state. You may not claim a credit on Schedule CR for that tax. You
must file the appropriate forms with that state to receive a refund of tax withheld in error.
Thus, Illinois residents are not allowed a credit against their Illinois income tax liability for taxes paid
to Kentucky on wage income. To correct Kentucky income tax withholdings from Illinois residents,
taxpayers must file a refund claim with Kentucky. Taxpayers may only claim a foreign tax credit on
Schedule CR for taxes paid to Kentucky on non-wage income taxable by that state.
However, your situation is unusual in that there were local taxes withheld on your wage income which
is not covered by the reciprocal agreement. The COUNTY (Kentucky) taxes are not imposed by the
State of Kentucky so the withholding is not prohibited by the agreement. Currently the regulations do
not address this situation, the result of which is a double taxation. We have reviewed your Kentucky
W-2 information and agree that you are entitled to a credit for the amount of local income tax
withholdings.
The Illinois Department of Revenue regulations provide information regarding calculating the foreign
tax credit and what documentation is required to support claims for credit. 86 Ill.Admin.Code
100.2197(g) states:
g)

Documentation required to support claims for credit. Any person claiming the credit
under IITA Section 601(b)(3) shall attach a statement in support thereof and shall notify
the Director of any refund or reductions in the amount of tax claimed as a credit under
IITA Section 601(b)(3) all in such manner and at such time as the Department shall by
regulations prescribe. No credit shall be allowed under this Section for any tax paid to
another state nor shall any item of income be included in base income subject to tax in
that state except to the extent the amount of such tax and income is evidenced by the
following documentation attached to the taxpayer's return (or, in the case of an
electronically-filed return, to the taxpayer's Form IL-8453, Illinois Individual Income Tax
Electronic Filing Declaration), amended return or claim for refund:
1)

credit must attach a copy of the tax return filed for taxes paid to the other Unless
otherwise provided in this subsection (g), a taxpayer claiming the state or states
to the taxpayer's Illinois income tax return, Form IL-8453, amended return or
claim for refund.

2)

If the tax owed to the other state is satisfied by withholding of the tax from
payments due to the taxpayer without the necessity of a return filing by the
taxpayer, the taxpayer must attach a copy of the statement provided by the payor
evidencing the amount of tax withheld and the amount of income subject to
withholding.

3)

A taxpayer claiming a credit for taxes paid by a Subchapter S corporation or
partnership on the taxpayer's behalf must attach a copy of the statement

IT 12-0020-GIL
July 31, 2012
Page 5
provided to the taxpayer by the Subchapter S corporation or partnership pursuant
to subsection (f) of this Section, showing the taxpayer's share of the taxes paid
and the income of the taxpayer on which the taxes were paid.
The documentation you have provided is sufficient to support your claim for the foreign tax credit. As
stated above, this is a general information letter which does not constitute a statement of policy that
either applies, interprets or prescribes tax law. It is not binding on the Department. Should you have
additional questions, please do not hesitate to contact our office.
Sincerely,

Heidi Scott
Associate Counsel -- Income Tax