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.
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.