Resident of Illinois but worked in Iowa at college. Didn't submit reciprocal agreement form to withhold only Illinois tax. Do we still have to submit an IA state return?

[jjc99]

My son worked in in Iowa while at college. He had Iowa state tax withheld. I know he needs to submit to get the state tax refunded. Does he have to file and Iowa state tax return as a non-resident? Also, he didn't file out the reciprocal agreement form so Illinois tax was not being withheld on his Iowa earnings. Now, it looks like we owe a penalty. Is there a way around that since the states do have reciprocal agreements?

[SteamTrain]

Unfortunately...there may be an IL  penalty.

As an IL resident ALL his IA income is considered IL income, and no credit is allowed for taxes paid to IA since he is expected to get all his IA income refunded.

He'll need to file an IA non-resident tax return claiming zero as his IA income.  IA says this:

" Illinois residents who have had Iowa income tax withheld in error from their wages and have no other Iowa-source income must file an Iowa income tax return requesting a refund. They should complete Steps 1, 2, and 3 of the IA1040, show “0” on line 1 of Step 4, line 26 of Step 5, and line 53 of Step 8, write “Illinois resident tax withheld in error” on the face of the return. On the back of the IA 1040 on lines 62, 65, 68, 69, and 70, enter the Iowa tax withheld, sign the return and include copies of W-2s with the return. Copies of federal and Illinois returns must be enclosed."

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In the tax software, I'm not sure how that is handled or whether he will have to mail-file as noted ( Copies of federal and Illinois returns must be enclosed. )  

In order to indicate zero income in IA, you may need to set box 16 on his software IA-W-2 to zero....and when doing that, it usually results in you having to mail file that IA-state tax return.

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If he continues to work in IA, make sure he gets the reciprocity form in...whether they can withhold IL taxes...he'll have to find out as not all IA employers can...but IA withholding can be stopped to prevent having to repeat thsi next year (unless they've already withheld some IA taxes for 2019).

https://tax.iowa.gov/sites/files/idr/forms1/EmployeesStatementOfNonresidence%2844016%29.pdf