How to file tax in Illinois and Kentucky as married couple?

[syang80]

I moved from Kentucky to Illinois in Sep 2018. I quitted my job in Kentucky and did not earn any income in Illinois(I lived in KY while I was working in KY). My husband worked and earned all the income in Illinois during 2018. We decide to file federal tax jointly(MFJ); However, we are not  sure how to file state tax properly and avoid double tax. 

During 2018, I was a part-year resident in both KY and IL and my husband was a resident in IL. If I file IL tax with my husband jointly, I will be taxed as a resident. With the reciprocal agreement between IL and KY, should I:

1) take a tax credit in IL for income taxes paid to KY and Lexington, KY(local tax)? And how?

or 

2) claim a state tax refund in KY and a local tax refund in Lexington, KY and pay tax in IL? And how?

[DanielV01 · Accepted solution]

Both states allow you the option to file married filing separately even if you file a joint return on your Federal Return.  I believe that you will find this the easiest way to file your returns this year.  That is primarily because Illinois will tax his income, and KY will tax yours (since you didn't have any Illinois income), so it will be less complicated this way.

You can choose to file joint returns, but it does get a little complicated to do so.  You can choose option 1 above to file the Illinois return jointly, but option number 2 is not available.   Since you were living in KY at the time, you cannot claim a full refund of state tax.  Reciprocity does not apply.  And KY local tax is never refunded.  KY local tax is assessed on anyone working in the locality.  If you were working in Lexington, you pay tax to Fayette County, and the employers take out the exact amount for that.

It will be simpler to file to separate state returns, but there is work to do with it.  This FAQ can assist you with this:  https://ttlc.intuit.com/replies/3301995

[syang80]

I have a follow-up question. If we still decide to file state tax jointly, how to calculate the tax credits in IL for the income tax paid to KY? Thanks!

[DanielV01]

I don't recommend it (get's complicated).  Illinois and KY are reciprocal states, so they don't give credits for taxes paid to the other state, rather, you are simply taxed in your home state.  It's possibly acceptable to file an Illinois resident return joint and file a non-resident reciprocal return to KY.  You would be saying that you want to be considered a full-year resident in Illinois and your income taxed in Illinois instead of KY.  If you do this, then you file a KY Noresident Reciprocal return, and KY refunds you all of your tax paid in.  And on the Illinois return you can claim a credit for the tax you paid to Lexington.  If you wish to do it that way let me know.