Why do I owe Michigan so much if I lived in Michigan all year?

Where did you work?  And double-check your W2 and MI tax withholding entries.

I worked in Michigan only. My husband worked in Michigan and Indiana. But wouldn't that affect our Indiana return only in terms of owing?

You can reduce the Michigan tax.  You actually have two different things you can do to reduce Michigan tax.  First, if Indiana state taxes were withheld from your husband's paycheck (check box 17 where the state line says Indiana), this was a mistake by your husband's employer.  Indiana and Michigan have a reciprocal agreement:  since you live in Michigan, you only pay Michigan state tax even though you work in Indiana.  You will file an Indiana nonresident reciprocal return (not a regular nonresident return) in order to have all of the Indiana state taxes withheld refunded to you.  That in and of itself will not reduce your Michigan tax, but it will give you back the Indiana taxes, and that will help,

But there is a second technique.  Although Indiana and Michigan do have a reciprocal agreement for state taxes withheld, Indiana local taxes are not a part of that agreement and generally do not get refunded through a nonresident reciprocal return.  However, Michigan will allow you to claim a credit on local taxes withheld by an Indiana county, as mentioned in this website:  Michigan Credit for Taxes Paid to Government Units Outside of Michigan

 To do this:

1. On the Michigan resident return, keep navigating until you reach the screen Take a look at Michigan credits and taxes.
2. On that screen, scroll down to Other credits, and click Start on Other State Tax Credit.  
3. The next screen asks Qualify for the Other State Tax Credit?  The answer is YES, even though the screen says you cannot claim a credit for taxes you paid to a reciprocal state.
4. On the next screen, Other State, click on the drop down box.  The first selection is "City/county/locality outside Michigan".  Choose that and hit Continue

You may have to input manually the amount of tax you paid to the Indiana county, and on how much income you paid the tax, but this will be credited to you on your Michigan return.

Although you won't get a direct refund from Indiana for the local taxes, it will lower your Michigan tax and be added on to the Michigan refund.

SO does that mean we should be refunded state tax withheld from box 17? If so, how do we do the reciprocal state form?

On the Indiana state return, you choose the Indiana Nonresident Reciprocal return.  That automatically provides an Indiana refund for taxes withheld by Indiana State.  For the county taxes you use the technique I describe above.