What you are seeing on the Federal Return is correct and you understand it perfectly. You itemized and used the full amount of Missouri tax to itemize, and so when you are refunded, you include the refund in your income along with your wages. (A refund of 2017 taxes in 2018 is included in 2018 taxable income). But this treatment only affects the Federal Return.
What you are seeing on your 2018 tax return for Illinois is the correct treatment. Illinois does not give you a tax credit for the amount of tax withheld to Missouri, but rather gives a credit on the Missouri Tax Liability. In essence, its the amount of tax withheld MINUS the tax refund. (If you owed MO tax at the end of the year, the amount owed would be ADDED to the amount withheld). That is the number that is the basis of the tax credit. (I'm not 100% on the line numbers, but I hope this helps you).
What looks like might be the case is that the Illinois returns in prior years might not have been prepared correctly, because instead of reporting the amount withheld for the tax paid to other state credit, the amount should have been the tax withholding minus the tax refund. Having said this, however: do you pay a local tax (Box 19 on your W2)?
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
