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