Live in Kentucky but work in Clark County, Indiana. We pay local taxes only. Do we need to file an Indiana return?

[Hal_Al]

Q. Do we need to file an Indiana return?

A. No.

 The reciprocity agreement between IN & KY does not apply to local city or county taxes. You are not required to file a county return (part of the IN state forms), but you are also not entitled to a refund of the county withholding (box19 on your W-2), unless there was an error in the amount. If you are subject to a KY county or city tax, you should check to see if the KY city will give you a credit for the IN county tax withheld. KY does allow an itemized deduction (Schedule A) for local tax paid, on the state return. 

[TomD8]

Be aware that @Hal_Al 's answer applies only to salary or wage (W-2) income.  if you have any other kind of IN-source income (for example, rental income from a property located in IN), you'd have to file a non-resident IN return.

[Hal_Al]

@TomD8 

Correct,   the state reciprocal agreement only applies to W-2 wages.  I assumed that "We pay local taxes only"  meant that there was local  withholding in box 19 of poster's W-2. 

[TomD8]

@Hal_Al --

Taxpayers sometimes have both W2 and non-W2 income.  I just wanted to clarify that reciprocity applies only to W2 earnings.

[stevemlouky]

Yes, you do have to file with Indiana.  File Form IT-40RNR (Reciprocal Non-Resident Indiana Individual Income Tax Return) if you only have wages. If you have other income, you have to file Form IT-40PNR. Clark County's current tax rate is 2%.

Reference:

Indiana Dept of Revenue: Who Should File a Tax Return? 

[Hal_Al]

@stevemlouky  Thanks for posting that. That is what it seems to say. 

But that's not what it means.  You only file that form if you want a refund of improperly withheld IN state  or county income tax or the correct amount of county tax was not withheld and you owe county tax (or are getting a refund) of the difference. 

Reciprocal state workers, with the correct amount of withholding, (and that is the usual thing), do not need to go to the hassle and expense of filing a tax return that says they owe nothing and get nothing.