It depends. You are correct that you file both to Illinois and to Indiana. Here is how the process works:
You are an Illinois resident. Resident states tax all of your income no matter where you earn it. When two states have a reciprocal agreement, they agree that you are taxed where you live and not where you work. However, Illinois and Indiana do not have this agreement. They both tax you on the income, but your resident state (Illinois) will give you a credit for the income tax you must pay to Indiana for the income you earn there. You prepare the Indiana (nonresident) return first so that this credit is correctly calculated.
It is absoutely correct that your employer reported 100% of your wages as taxable to Indiana if you worked there. What is curious is they put 60% of your income to Illinois. It makes sense that they report income to Illinois because of the explanation in the preceeding parragraph, but 60% doesn't match the situation. However, you still receive a credit for Indiana taxes you pay, so if there was Illinois taxes also taken out, you will likely get that much more of a refund from Illinois. Illinois does tax you on all of your income, but does not double-up that income.
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