I live in Michigan and work in Indiana. I'm being charged Elkhart County tax (which quadrupled as of the first of 2017). Is there a way to get a refund on this tax?

[toddreitz]

So since I can deduct this on the Michigan tax form, why would I need to file an Indiana non- resident tax return?

[KrisD · Accepted solution]

To find out if you are eligible for any refund of the county tax you paid to Elkhart County Indiana, file an Indiana State return. You would file the Indiana return as a non-resident.

Since Michigan and Indiana are "Reciprocal States", you are only required to pay State Taxes to Michigan and not Indiana, however County taxes are not a part of this arraignment and you are liable to pay Elkhart County tax for the income you earn while working there.

Please be aware that the tax you pay to Elkhart County is deductible on line 18 on your Michigan State return.

Below are the instructions from the MI-1040 (Michigan State Return) for deducting the county tax you pay:

"Line 18: Income Tax Imposed by Government Units Outside Michigan. Include the amount of income tax paid to:

• A nonreciprocal state

• A local government unit outside Michigan, including tax

paid to local units located in reciprocal states

• The District of Columbia

• A Canadian province.

Include only income tax paid to another government unit(s)

on income earned while you were a Michigan resident and

taxed by Michigan. For assistance with calculating this credit, go to www.michigan.gov/incometax.

Attach a copy of the return filed with the other government unit(s) to your MI-1040. If you do not attach the return filed with the other government unit(s) when claiming this credit, processing of your return may be delayed or your credit may be denied."

(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)

[toddreitz]

So since I can deduct this on the Michigan tax form, why would I need to file an Indiana non- resident tax return?

[Hal_Al]

Because they say so. Michigan will give you credit for that on the state return, but you have to attach a copy of the IN return. So, even though the IN county does not require you to file a return, you have to file one to get the MI credit, even though there will be no tax due or refunded from the IN county.  Verified by e-mail question to MI Dept. of Treasury 6-8-15.
Quite frankly it appears to me the MI authorities are hoping you won't go to the trouble (and cost), so they can keep your money. Notify your state legislator.

IN has a specific form (IT-40RNR) for a reciprocal state refund. Rather than paying TurboTax for IN software, you should try filing that form by hand. It looks pretty  simple. Get it here: http://www.in.gov/dor/4733.htm

[KrisD]

(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.

[toddreitz]

Thanks. Now that I'm in process of doing the taxes, the deductions that I can take on lines 2A & 2B of the Indiana IT-40RNR form are pretty vague. Can someone point me to a better explanation of what is allowed?

[toddreitz]

Thanks. Now that I'm in process of doing the taxes, the deductions that I can take on lines 2A & 2B of the Indiana IT-40RNR form are pretty vague. Can someone point me to a better explanation of what is allowed?

[KrisD]

You might want to submit this as another question to get a better response. The software brings that information from your Federal return, that's why you need to do the returns in the following order:
1. FEDERAL
2. WORKPLACE  RECIPROCAL  NON-RESIDENT STATE (in your case, Indiana)
3. RECIPROCAL RESIDENT STATE (in your case, Michigan)
You will pay local tax on your income, but your income may be adjusted slightly with allowable adjustment.  If you are the only one that worked in Indiana, only 2A should have entries.
Again, if you ask this as a new question, you might get a better response.