If you received income subject to both Indiana state income tax and a local tax in another state, you may be allowed to deduct up to $2,000.

Example: You earned $8,000 in Smith City, Kentucky. Your employer withheld a Smith City (local) tax from your wages. Since your wages were taxed by a non-Indiana locality (Smith City), you are eligible to take a $2,000 deduction.

You may deduct the amount of your income taxed by a non-Indiana locality or $2,000, whichever is less. If you and your spouse both qualify, you may each claim the deduction for a maximum of $4,000 (limited to no more than $2,000 per person).

You must attach proof the tax was paid to a locality outside Indiana to be allowed this deduction. A W-2 form is sufficient proof as long as the W-2 form shows an amount and the non-Indiana locality where the tax was paid. The name of the locality is usually found in box 20, Locality Name, of the W-2 form. A copy of a non-Indiana locality tax return will also serve as proof of tax paid.

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