My wife and I live in indiana. She works in Kentucky, and I work in Indiana. These are reciprocal states.

[dueses]

Her employer does withold for indiana as per her w-2, but she also has a separate w-2 showing local income tax for the county (and one for the city) she works in in Kentucky .Box 18 shows local wages as her annual salary and box 19 local income tax paid , and box 20 the county (and city on the other w-2). do I need to file a kY return?

[Hal_Al · Accepted solution]

The reciprocity agreement does not apply to local city & county taxes. You are not required to file a local city return, but you are also not entitled to a refund of the city withholding (box19 on your W-2), unless there was an error in the amount. 

Indiana allows a deduction, up to $2000, for income taxed by another state city. Some (but not all) IN counties also allow a credit, or partial credit for tax paid to an OH city. Those items will come up in the IN state interview.

[DS30]

No, you will not need to file any KY city return related to the local income tax withholdings taken out of her pay.