Why is Michigan taxing my total gambling winnings when part of them is sourced to Indiana?

[lassie8553]

I am a Michigan resident.  Michigan is taxing all my income, even though a portion of my gambling winnings have been reported on my Indiana non resident tax return. It seems to me that Michigan should only tax the portion of the gambling winnings that are sourced to Michigan, not the entire amount.  I have already paid Indiana state tax on the Indiana portion.  Should I include a subtraction on the Michigan form for income earned in another state to correct this?

[DanielV01]

Since Michigan is your resident state, it may tax all of your income regardless of where it was made or produced.  Indiana may also tax this income; the reciprocal agreement between Indiana and Michigan does not apply to gambling income.  However, Michigan will allow you to claim a credit for the tax you pay to Indiana on this income, so while you cannot deduct it on your Michigan return, the tax credit may cover the double-taxation.  These general instructions will assist you to claim this credit on your Michigan return (when you see the instruction for "City/county/locality outside Michigan", you will still want to select "Indiana" because the gambling winnings do not fall under the reciprocal agreement):  

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 Indiana, 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 these taxes, it will lower your Michigan tax and be added on to the Michigan refund or lower your Michigan liability.