KY and
IN have what is called a state reciprocal agreement. This allows nonresidents
to not have state withholding taxes taken out for wages earned in
the state.
In order to get the full refund of your IN
withholdings, you will need to file a nonresident IN return but report zero
"0" income from IN (even though you do have IN wage income). You
need to file your IN return this way because IN does not allow a credit for tax
paid to a reciprocal state on the wages, salaries and commissions. If tax
was withheld by a reciprocal state (IN), you must file directly with the state
for a refund of those taxes. You must mail in this return and include your
state W-2 information. You will want to include an explanatory statement with
your KY return stating your situation (that your KY employer withhold KY taxes
from your wages in error).
You will include all income from both inside and outside the state on your KY resident state income tax return. You will not be allowed a tax credit for taxes paid to IN on your KY tax return.
To
avoid this issue in the future, you need to file an exemption form with your IN
employer. Workers exempt under a reciprocal agreement must complete Form 42A809, Certificate of Nonresidence, which
must be kept on file by the employer.
