Illinois-Indiana-Iowa-Kentucky-Michigan-Wisconsin Reciprocity Explained

The Midwest reciprocity cluster is one of the oldest and most interconnected in the country. Six states — Illinois, Indiana, Iowa, Kentucky, Michigan, and Wisconsin — maintain a web of bilateral agreements that allow cross-border commuters to pay income tax only to their state of residence. The cluster has been growing and adapting for more than half a century, and the last several years have brought a wave of flat-tax reforms that have simplified the math without altering the underlying reciprocity mechanics.

This guide walks through every agreement in the Midwest cluster, identifies the exemption form for each crossing, and explains how the recent flat-tax conversions in Iowa and Kentucky have changed the practical calculus. We cite the Illinois Department of Revenue, the Indiana Department of Revenue, the Iowa Department of Revenue, the Kentucky Department of Revenue, the Michigan Department of Treasury, and the Wisconsin Department of Revenue throughout. Use the worked examples to verify your own situation, then run your numbers through our calculator.

The Midwest reciprocity cluster

The cluster traces its origins to the mid-twentieth century, when states in the industrial Midwest recognized that labor markets routinely crossed state lines. The Illinois-Indiana agreement, for example, was signed in 1967 and has been in continuous effect since. Today, the cluster includes more than a dozen bilateral agreements, with Indiana and Kentucky each maintaining the broadest partner networks.

The cluster is interconnected rather than uniform. Each bilateral agreement is a separate instrument with its own statutory authority in each participating state. An Indiana resident can claim exemption from Kentucky withholding because of the IN-KY agreement, and a Kentucky resident can claim exemption from Indiana withholding under the same instrument. But a Kentucky resident cannot rely on the IN-KY agreement to claim exemption from, say, Ohio withholding — that requires the separate KY-OH agreement.

What makes the cluster work is the symmetry of treatment: each partner state extends the same exemption to residents of the other. This symmetry has held even as the participating states have changed their underlying tax structures. Indiana's rate has dropped steadily since 2017, Iowa moved to a flat 3.8% rate effective 2025, and Kentucky moved to a flat 4% rate in 2024. None of these changes disrupted the reciprocity agreements because reciprocity is structurally independent of the underlying rate.

The agreements in detail

Illinois maintains reciprocity with five partners: Indiana, Iowa, Kentucky, Michigan, and Wisconsin. The Illinois Department of Revenue administers these agreements under the Illinois Income Tax Act, and the exemption form for all five is the IL-W-5-NR. An Illinois resident working in any of the five partner states files IL-W-5-NR with the out-of-state employer to claim exemption from that state's withholding.

Indiana's reciprocity network is the widest in the cluster, extending to six partners: Illinois, Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin. The Indiana Department of Revenue administers the agreements through Form WH-47, which an Indiana resident files with an out-of-state employer. Indiana's partner states each maintain their own equivalent form for their residents working in Indiana.

Kentucky's reciprocity covers seven partners: Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, and Wisconsin. Kentucky historically also maintained an agreement with Tennessee tied to the now-repealed Hall income tax, but that agreement has been dormant since Tennessee fully repealed its tax on investment income in 2021. The Kentucky Department of Revenue administers reciprocity through Form 42A809.

Michigan's reciprocity covers six partners: Illinois, Indiana, Kentucky, Minnesota, Ohio, and Wisconsin. The Michigan Department of Treasury administers these agreements through the MI-W4, the same form Michigan uses for general withholding elections. Michigan residents claiming exemption from another state's withholding file the partner state's form with the out-of-state employer.

Wisconsin maintains reciprocity with four partners: Illinois, Indiana, Kentucky, and Michigan. The Wisconsin Department of Revenue administers these through Form WI-220. Wisconsin is unique in the cluster for not having reciprocity with Iowa or Minnesota, despite sharing borders with both — Wisconsin residents who commute to Minnesota or Iowa face the standard non-resident withholding and must claim a credit on their Wisconsin return.

Iowa has the narrowest reciprocity footprint in the cluster, with only one partner: Illinois. The Iowa Department of Revenue administers this through Form IA 220. Iowa residents who commute to Nebraska, South Dakota (which has no income tax), Wisconsin, or Missouri must use the standard non-resident credit mechanism.

The exemption forms

Each state in the cluster has its own exemption form. The table below summarizes the form each resident would file with an out-of-state employer to claim reciprocity.

The forms share a common structure: name, address, Social Security number, certification of residency, and a signature under penalty of perjury. Each form includes a line identifying the partner state, and most require the employee to attest that the information is true. Employers must retain the form on file for the duration of employment and for several years afterward for audit purposes.

How the cluster has evolved with flat-tax reforms

The past decade has seen four of the six cluster states convert from graduated brackets to a flat tax. Illinois has had a flat 4.95% rate since 2011, when the legislature temporarily raised the rate from 3% and later made the higher rate permanent. Indiana has steadily reduced its flat rate since 2017, when it stood at 3.3%; for 2025 the Indiana DOR confirms a flat 3.05% rate. Michigan has had a flat 4.25% rate since 2012, with periodic legislative debate about a further reduction.

Kentucky moved from a graduated structure to a flat 4% rate effective January 1, 2024, under House Bill 8 enacted in 2022. The Kentucky Department of Revenue confirms the 4% flat rate continues for 2025. Iowa made the most dramatic shift: Senate File 2442, signed in March 2024, replaced Iowa's prior graduated structure with a flat 3.8% rate effective January 1, 2025, three years ahead of the prior law's scheduled phase-in.

Wisconsin remains the only cluster state with a graduated income tax. For 2025, the Wisconsin brackets are 3.50% on income up to $14,830 (single) or $19,770 (MFJ); 5.30% on income up to $29,660 (single) or $39,540 (MFJ); and 7.65% on income above those thresholds, per the Wisconsin Department of Revenue. A Wisconsin resident commuting to Illinois under reciprocity is taxed only by Wisconsin at these rates, not by Illinois at 4.95%.

These flat-tax reforms simplify the withholding math — payroll systems need to apply one rate, not bracket tables — but do not change the reciprocity process. The exemption forms and filing mechanics remain identical. The reforms do shift the relative tax burden for cross-border commuters: a high-earning Indiana resident commuting to Illinois under reciprocity now pays Indiana's 3.05% rather than Illinois's 4.95%, a meaningful annual savings.

Worked examples

Example 1: Illinois resident working in Wisconsin. A financial analyst lives in Chicago and commutes to a corporate office in Kenosha, Wisconsin. She files Form IL-W-5-NR with her Wisconsin employer, claiming exemption from Wisconsin withholding. The Wisconsin employer withholds no Wisconsin state income tax. Illinois state income tax of 4.95% is withheld through the employer's Illinois payroll registration, or the employee makes Illinois estimated payments. At year-end, she files Illinois Form IL-1040 reporting all wages and does not file a Wisconsin return.

Example 2: Kentucky resident working in Ohio. A teacher lives in Covington, Kentucky, and commutes to a school in Cincinnati, Ohio. He files Form 42A809 with his Ohio employer, claiming exemption from Ohio withholding under reciprocity. The Ohio employer withholds no Ohio state income tax but should still withhold Ohio school district income tax if the teacher works in a taxing school district — though as a Kentucky resident, he is not subject to Ohio SDIT, and the employer should not withhold it. Kentucky's 4% flat tax is withheld through Kentucky payroll registration or via estimated payments. At year-end, he files Kentucky Form 740 and does not file an Ohio return.

Example 3: Indiana resident working in Michigan. A nurse lives in South Bend, Indiana, and commutes to a hospital in Niles, Michigan. She files Form WH-47 with her Michigan employer, claiming exemption from Michigan withholding. The Michigan employer withholds no Michigan state income tax of 4.25%, but the Michigan city of Niles does not levy a city income tax, so there is no local complication. Indiana state income tax of 3.05% is withheld, along with the St. Joseph County resident tax of approximately 1.35%. At year-end, she files Indiana Form IT-40 and does not file a Michigan return.

Indiana county tax complications

Indiana is the only state in the cluster with a county-level income tax administered alongside the state income tax. Each of Indiana's 92 counties sets a rate between 1.00% and 3.38% for 2025, with the rate applying to residents of the county (resident rate) and to non-residents who work in the county (non-resident rate, typically 0.25% to 0.50% lower than the resident rate).

The Indiana county tax follows separate sourcing rules from the state income tax. For Indiana residents, the resident county tax applies regardless of where wages are earned — so an Indiana resident commuting to Michigan under reciprocity still owes their resident county tax. The Indiana Department of Revenue collects this alongside the state tax, and employers in Indiana (or out-of-state employers with Indiana payroll registration) handle the withholding.

For non-residents working in Indiana, the non-resident county tax applies if the work county levies the tax — even when state-level reciprocity prevents Indiana from taxing the wages. A Kentucky resident working in an Indiana county that levies the tax owes the non-resident county rate; the Indiana state tax does not apply, but the county tax does. This is the most commonly overlooked withholding item in the Indiana reciprocity context.

Michigan city income tax

Michigan allows roughly two dozen cities to levy their own income tax, separate from the 4.25% state tax. Detroit's rate for 2025 is 2.40% for residents and 1.20% for non-residents, per the Detroit Income Tax Ordinance. Grand Rapids levies 1.50% for residents and 0.75% for non-residents. Other taxing cities include Lansing, Saginaw, Flint, Pontiac, and Port Huron, each with rates set locally.

The city income tax is unaffected by reciprocity. A non-resident who works in Detroit — including residents of Ohio, Indiana, or any other reciprocity partner — owes Detroit non-resident income tax on those wages. The Michigan Department of Treasury administers most city income taxes, though Detroit maintains its own income tax division. Employers in taxing cities must register separately for city withholding and report it on the employee's W-2 in Box 19.

A Michigan resident who commutes to a reciprocity partner state owes no city income tax to their Michigan home city on wages earned out of state, because most Michigan city income taxes are based on residency and work location. However, Michigan residents who work in a taxing city of another state — for example, a Michigan resident commuting to a non-Michigan city with its own income tax — may owe that city's tax under local rules. These situations are rare in the Midwest reciprocity cluster, since none of Michigan's reciprocity partners has a comparable city-level income tax.

Common mistakes

The most common mistake in the Midwest reciprocity cluster is forgetting to file the exemption form when changing employers. Reciprocity does not carry over automatically; each new employer requires a new exemption form. Workers who change jobs mid-year often see work-state withholding on their first few paychecks and must file for a refund at year-end through a non-resident return.

Second is overlooking Indiana county tax withholding. An Indiana resident commuting to Ohio or Michigan under reciprocity still owes Indiana county tax, and the employer must set this up correctly. Likewise, a Kentucky resident working in an Indiana county that levies the non-resident tax owes that local tax, which reciprocity does not cover.

Third is overlooking Michigan city income tax. Non-residents working in Detroit, Grand Rapids, or other taxing cities owe the non-resident city rate regardless of reciprocity. Many out-of-state employers are unaware of this and fail to register for city withholding, leaving the employee to make estimated city tax payments.

Fourth is assuming reciprocity covers all forms of compensation. Bonuses, commissions, and stock option exercises are still wages for reciprocity purposes, but severance pay, deferred compensation, and certain other items may be sourced differently. Workers receiving unusual compensation should consult a tax professional to confirm sourcing.

Fifth is assuming Wisconsin has reciprocity with Iowa or Minnesota. It does not. Wisconsin residents who commute across those borders must use the standard non-resident withholding and credit mechanism, filing both a Wisconsin return and a non-resident return for the work state.

What to do next

Pull your most recent pay stub and identify which states have income tax withheld. If you are a Midwest reciprocity commuter and see withholding for a state where you do not reside, confirm reciprocity applies and file the appropriate exemption form with your employer. Indiana residents should verify that county tax withholding is in place, and Indiana workers should check whether the county where they work levies the non-resident rate. Michigan workers in taxing cities should confirm city income tax withholding is set up correctly. Run your full-year numbers through our calculator to project your tax liability under reciprocity, then adjust your W-4 or estimated payments if you detect a shortfall before year-end.