Could Illinois residents claim a Schedule CR credit for Wisconsin income tax paid on employee wages?

Plain-English summary

The Illinois residents could not claim an Illinois credit for Wisconsin tax paid on employee wages because reciprocity made those wages exempt from Wisconsin tax. Illinois taxed the residents' income, including wages earned in Wisconsin, but the reciprocal agreement prevented Wisconsin from taxing their employee compensation.

If Wisconsin tax was withheld or paid on the wages, the remedy was a Wisconsin refund claim, not Schedule CR. The GIL pointed to Wisconsin Form W-220 for telling an employer not to withhold Wisconsin tax from an Illinois resident's wages.

The ruling distinguished non-wage income. A taxpayer could still claim an Illinois Schedule CR credit for qualifying Wisconsin tax on non-wage income that Wisconsin was entitled to tax.

What this means for you

Separate wages from other Wisconsin-source income. For reciprocal wages, stop erroneous withholding with the appropriate declaration and seek the other state's refund; use Schedule CR only for qualifying tax on non-wage income.

Common questions

Q: Why was the Illinois credit denied?
A: Because the reciprocal agreement meant Wisconsin was not entitled to tax the Illinois residents' wages.

Q: Could the taxpayers recover Wisconsin withholding?
A: Yes. IDOR instructed them to file a Wisconsin refund claim.

Q: Could Wisconsin tax on non-wage income qualify for Schedule CR?
A: Yes, if that non-wage income was taxable by Wisconsin and met the credit rules.

Citations and references

• 35 ILCS 5/203(a), 301(a), 302(b), 601(b)(3)
• Illinois Schedule CR
• Wisconsin Form W-220

Subject

Credits – Foreign Tax

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2010/ig100021.pdf

Original ruling text

IT 10-0021-GIL 08/17/2010 CREDITS – FOREIGN TAX
General Information Letter: Illinois residents are exempt from Wisconsin income tax on
employee wages, and so are not allowed a credit for taxes paid to Wisconsin on wages.
August 17, 2010
Dear:
Your 2008 Illinois income tax return, with related correspondence, has been forwarded to me for
consideration. The nature of your correspondence and the information in the file require that we
respond with a General Information Letter, which is designed to provide general information, is not a
statement of Department policy and is not binding on the Department. See 86 Ill. Adm. Code
1200.120(b) and (c), which may be found on the Department's web site at www. tax.illinois.gov.
The file and correspondence include the following documents:
•

•

A joint 2008 Illinois income tax return on Form IL-1040, to which is attached a Schedule ICR
on which you claim a credit for Illinois property taxes paid on your principal residence and a
Schedule CR on which you claim a credit for taxes paid to Wisconsin on $62,683 in income
that was taxed by both Illinois and Wisconsin.
A joint 2008 Wisconsin income tax return on Form 1NPR, on which you report that you are
residents of Illinois and were not residents of Wisconsin for any part of that year. The return
also reports $66,799 in total wages for the year, and reports all of those wages as Wisconsin
sourced. The return reports a Wisconsin income tax liability of $3,313.

The Department disallowed the credit claimed on the Schedule CR for taxes paid to Wisconsin. In
your correspondence, you assert that you properly reported and paid Wisconsin income tax on your
Wisconsin-sourced income as nonresidents of Wisconsin, and that the credit claimed on the
Schedule CR should be allowed.
Response
Under the Illinois Income Tax Act, a resident of Illinois is taxable on income earned in Wisconsin.
Specifically, Section 301(a) of the Illinois Income Tax Act (35 ILCS 5/301) provides:
All items of income or deduction which were taken into account in the computation of
base income for the taxable year by a resident shall be allocated to this State.
Under Section 203(a) of the Illinois Income Tax Act (35 ILCS 5/203), “base income” is the amount
reported on Line 9 of the Form IL-1040, and is equal to the individual’s “adjusted gross income” as
properly reported on his or her federal income tax return and on Line 1 of the Form IL-1040, after
taking into account the modifications reported on Lines 2 through 8.
In order to prevent an Illinois resident from paying state income tax twice on the same income,
Section 601(b)(3) of the Illinois Income Tax Act (35 ILCS 5/601) allows a credit for taxes paid to
another state on income taxed by both that state and by Illinois.
Section 302(b) of the Illinois Income Tax Act (35 ILCS 5/302) provides:
The Director may enter into an agreement with the taxing authorities of any state which
imposes a tax on or measured by income to provide that compensation paid in such

IT 10-0021-GIL
August 17, 2010
Page 2
state to residents of this State shall be exempt from such tax; in such case, any
compensation paid in this State to residents of such state shall not be allocated to this
State.
Under that authority, the States of Illinois and Wisconsin entered a “reciprocal agreement” effective
January 1, 1974, pursuant to which neither state taxes, or requires withholding from, wages earned in
the state by a resident of the other state.
The instructions to the Schedule CR expressly provide:
If you earned wages, salaries, tips, or other employee compensation from an employer
in Iowa, Kentucky, Michigan, or Wisconsin while you were a resident of Illinois, you are
covered by a reciprocal agreement between that state and Illinois and are not taxed by
that state on your compensation. However, you may be taxed on other income.
If your employer withheld taxes or you paid tax to these states on your compensation,
you must claim a refund from that state. You may not claim a credit on Schedule CR for
that tax. You must file the appropriate forms with that state to receive a refund of taxes
withheld in error
See also the enclosed copy of the Wisconsin Form W-220, Nonresident Employee’s Withholding
Reciprocity Declaration. This is the form an Illinois resident uses to inform his or her employer that no
Wisconsin income tax should be withheld from his or her wages pursuant to the reciprocal agreement
between the two states. Note that the last sentence informs the employee that, if Wisconsin income
tax was withheld, the employee must file a Wisconsin return and claim a refund of the amounts
withheld.
Accordingly, you are not allowed a credit against your Illinois income tax liability for taxes paid to
Wisconsin on wages earned during 2008 because you were Illinois residents for the entire year. If
Wisconsin taxes were withheld from your wages, you must file a refund claim with Wisconsin. You
may claim a credit on Schedule CR only for taxes paid to Wisconsin on your non-wage income
taxable by that State.
As stated above, this is a general information letter which does not constitute a statement of policy
that applies, interprets or prescribes the tax laws, and it is not binding on the Department. If you are
not under audit and you wish to obtain a binding Private Letter Ruling regarding your factual situation,
please submit all of the information set out in items 1 through 8 of Section 1200.110(b). If you have
any further questions, you may contact me at (217) 782-7055.
Sincerely,

Paul S. Caselton
Deputy General Counsel – Income Tax