Q. Do we need to file an Indiana return?
A. No.
The reciprocity agreement between IN & KY does not apply to local city or county taxes. You are not required to file a county return (part of the IN state forms), but you are also not entitled to a refund of the county withholding (box19 on your W-2), unless there was an error in the amount. If you are subject to a KY county or city tax, you should check to see if the KY city will give you a credit for the IN county tax withheld. KY does allow an itemized deduction (Schedule A) for local tax paid, on the state return.
