State taxes for 401K withdrawal as non-resident

[Tim72]

I live in Indiana and work in Illinois. I paid state taxes in Indiana and Illinois for the money I earned in Illinois. I withdrew money from my 401K last year and I paid Indiana state taxes on it. When I filed my Illinois state taxes this year, I did not claim the 401K withdrawal as money I earned in Illinois. Now Illinois contacted me and said I owe them more state taxes because my federal AGI is higher than what I paid taxes for in Illinois. The reason my AGI is higher is because of the 401K withdrawal.

Should I have to pay Illinois taxes on the 401K withdrawal even though I live in Indiana and paid Indiana taxes on it? The 401K account is through my Illinois employer. Thank you.

[TomD8]

By federal law, retirement plan distributions are taxable only by the taxpayer's state of residence at the time the distribution is received.

https://www.law.cornell.edu/uscode/text/4/114

On your Illinois Schedule NR, Line 14 Column B should be blank.

The letter you received from Illinois should contain instructions on how to appeal. 

[DMarkM1]

Additionally, Illinois does not tax retirement income including early withdrawal from a 401K.  Possibly there is some other income they are questioning.