Illinois and reciprocal agreement with Michigan

Question

So I am confused. In the Illinois software I selected Michigan as the state my client worked in but lived in Illinois. Employer in Michigan withheld Michigan taxes. They should not have. This was the case for 2017, 2018 and 2019. We got a letter from Illinois that is disallowing the tax credit from Michigan due to the reciprocal agreement for only 2019. IL assessed penalties and told us to get the money back from Michigan.

I guess I am aware of the reciprocal agreement but I thought I input it all correctly as I marked the MI box in Illinois

1) Why wasn't this caught by Illinois in 2017 & 2018, did something change in 2019 in Illinois or the software? Do you think they still may come back for 2017 & 2018?

2) Why if I prepared the Michigan return first, Illinois second and selected Michigan as the state in the tax software why was the credit allowed?

Is this a software glitch or do I need to enter this differently somehow to make it work?

On line 50 I x'd the box that says Michigan yet it did not say we couldn't take the tax credit from Michigan and allowed the withholdings from Michigan to remain as a credit.

I need to figure this out as 2020 will be the same.

thank you in advance.

Stay safe

Liz

garman22 · Accepted Answer

Did you check the box for non-resident state and fill out non-residency worksheet on federal info worksheet?

There should be NO tax credit on Illinois. These are reciprocal states. You pay full tax in illinois on the income and claim a full refund on Michigan.

What I always try to do is file the non-resident state first and early and use the refund to pay off illinois. The bad thing is is that there will be a penalty for underpaying Illinois income tax as no tax was withheld. If employer does not withhold Illinois going forward and client can afford it, make estimated tax payments.

Ephesians3-14 · Answer

1) Why wasn't this caught by Illinois in 2017 & 2018, did something change in 2019 in Illinois or the software? Do you think they still may come back for 2017 & 2018?

NOTHING CHANGED. THEY HAVE BEEN RECIPROCAL STATES FOREVER.

2) Why if I prepared the Michigan return first, Illinois second and selected Michigan as the state in the tax software why was the credit allowed?

THERE ARE NO CREDITS INVOLVED WHATSOEVER. DOESN'T MATTER THE ORDER YOU PREPARE THEM IN...SAME RESULT. THERE ARE NO CREDITS AT ALL IN THIS SCENARIO.

HERE'S HOW TO MAKE IT WORK:

1. FIRST ENTER THE WAGES ON THE W-2 WKSHT AND INDICATE "MI" AS THE STATE SOURCE.

2. BE SURE (ON THE INFO WKSHT AT THE BOTTOM) YOU MARK "NONRESIDENT" AND THEN ENTER 'MI". I'M SURE YOU'VE ALREADY DONE THIS. BUT WHAT YOU ARE VERY LIKELY DOING WRONG (COMMON ERROR) IS YOU NEED TO THEN...

3. GO INTO THE "QUICKZOOM TO NONRESIDENT STATE ALLOCATION WORKSHEET" AND ENTER ZERO AS THE WAGES IN THE MICHIGAN COLUMN. THE PROGRAM WILL AUTOMATICALLY ENTER THE MI WAGES IN THE MI COLUMN, BUT YOU NEED TO ZERO IT OUT. VOILA! PROBLEM SOLVED.

YOU'LL GET THE FULL MICHIGAN TAX REFUND AND OWE A BOATLOAD TO ILLINOIS BECAUSE YOUR CLIENT HAS NOT BEEN MAKING IL EST TAX PAYMENTS. HAVE THEM START MAKING IL EST TAX PMNTS FOR 2021.

Is this a software glitch or do I need to enter this differently somehow to make it work?

NOPE - NO SOFTWARE GLITCH AT ALL.

On line 50 I x'd the box that says Michigan yet it did not say we couldn't take the tax credit from Michigan and allowed the withholdings from Michigan to remain as a credit.

YOU GOT IT - YOU GET ABSLUTELY NO CREDIT WHATSOEVER BECUASE THEY ARE RECIPROCAL STATES.

Stay safe, warm and eat well. Oh, and brush your teeth too. 🙂

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