(On 1-16-17 I updated my original posting to explain the steps to take using TurboTax)
TurboTax can calculate the proper tax when involved with working in a reciprocal state and paying county tax in that state, but the order you work in the TurboTax program is important.
Please do your taxes in the following order:
1. FEDERAL
2. WORKPLACE RECIPROCAL NON-RESIDENT STATE (in your case, Indiana)
3. RECIPROCAL RESIDENT STATE (in your case, Michigan)
Since you seem to be more inquisitive than the average taxpayer, I will explain in the comments, but not in the original post, why the order you prepare your taxes is important.
Let’s say your employer withholds $4,000 in Michigan tax and $300 in Elkhart County tax.
When you prepare your Federal return, you might elect to itemize your deductions and use Income Taxes paid (Schedule A Line 5a) which would include both tax ($4300).
Next you would prepare your Indiana return and let’s say that the Elkhart County tax liability is calculated as $290, Elkhart County will send you a tax refund of $10.00.
Now you prepare your Michigan return. The 290 is the number that will flow to the Michigan State return line 18, because that is the number Michigan will give you credit for- the amount liable and paid, not the amount withheld.
ADDITIONALLY, NEXT YEAR, you will need to add the County Tax Refund (in this case $10.00) as income on your Federal return “Taxable refunds, credits, or offsets of state and local income taxes” as well as any state refund you might receive.
The good news is if you use TurboTax year after year, the software will help you pay your lowest tax liability, get the credits you deserve, and remind you of refunds you might have to claim.
