Your confusion would appear to be that your expectations are off.
Everything you describe says that TurboTax is doing it right.
You should get little or no refund from IL and have a big IN tax liability.
There is one thing missing, in your description: the credit, on the IN return, for the tax paid to IL. That should reduce the IN tax bill by about half.
Box 18, of your W-2, is wages for the county tax, not the IN state tax.
