Kentucky Tax Returns for Indiana Residents

Yes. R Tax Services prepares Kentucky returns for Indiana residents every year, from reciprocal wage refunds on Form 740-NP-R to full Kentucky nonresident returns for business, rental, and gambling income, along with the Indiana credit that goes with them. Our Evansville office is minutes from the Kentucky line, and Indiana and Kentucky multi-state returns are a routine part of our practice.

Who this is for

Plenty of Evansville area residents cross the river for work, whether that is a job in Henderson, a commute to Owensboro, or a business with Kentucky customers. If you live in Indiana and earn any money in Kentucky, or you found Kentucky tax on your W-2 and are not sure why, this page is for you.

How Indiana and Kentucky reciprocity works

Kentucky has reciprocal agreements with seven states: Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, and Wisconsin. Under 103 KAR 17:140, Indiana residents are exempt from Kentucky income tax on wages, salaries, and commissions. Indiana's own guidance describes the same agreement (Indiana Income Tax Information Bulletin 28). You pay Indiana tax on those wages as an Indiana resident, and Kentucky does not tax them.

There is one exception written into the regulation. If you keep a place of abode in Kentucky and spend more than 183 days there during the year, reciprocity does not apply and Kentucky treats you as a resident for tax purposes. Both conditions have to be met.

Stopping and recovering Kentucky withholding

• Form 42A809, Certificate of Nonresidence. Give it to your employer so they can stop withholding Kentucky income tax. If you move, you have to tell your employer within 10 days (Form 42A809).
• Form 740-NP-R, Nonresident Reciprocal State return. If Kentucky tax was withheld from your wages anyway, this return claims it back. It applies only when your Kentucky income is wages earned while living in a reciprocal state, and it is filed with a copy of your Indiana return (2025 Form 740-NP-R). Married couples each file their own.

Income reciprocity does not cover

The agreement covers compensation only. Kentucky's instructions say that gambling winnings and distributive share income reported on a Schedule K-1 are not exempt, and nonresidents report income from activities carried on in Kentucky and from property located there (2025 Form 740-NP instructions). That includes:

• Self-employment or contract income from work done in Kentucky
• Rental income from Kentucky property
• Partnership and S corporation income from Kentucky operations
• Gambling winnings from Kentucky casinos, tracks, or lottery

When that income meets Kentucky's filing threshold, you may need a full Kentucky Form 740-NP. Indiana then gives you a credit for taxes paid to other states, claimed on Schedule 6 of the IT-40 (Indiana Income Tax Information Bulletin 28), so the same income is not fully taxed twice. Getting the two returns to agree is most of the work.

Local taxes: Kentucky occupational license taxes and Indiana county tax

Many Kentucky cities and counties charge an occupational license tax on wages earned for work done inside their borders (for example, KRS 68.197 for counties). These local taxes are separate from the state income tax and are not part of the reciprocity agreement, and Form 740-NP-R does not refund them. They usually show up in W-2 boxes 18 through 20 (IRS W-2 instructions), though some employers use box 14.

On the Indiana side, you also owe county income tax based on the county you lived in on January 1 of the tax year (IC 6-3.6). Current county rates are published in Indiana Departmental Notice 1. Indiana also offers a credit for local taxes paid outside Indiana, which can apply to Kentucky occupational taxes.

What to bring or upload

• All W-2s, including the state and local boxes (15 through 20) and box 14
• Any 1099s or K-1s that involve Kentucky work, property, or businesses
• W-2G forms for Kentucky gambling winnings
• Rental income and expense records for Kentucky property
• Any Kentucky city or county occupational license returns you filed
• Your county of residence on January 1, and the date of any move between states
• Prior year federal, Indiana, and Kentucky returns, if you are new to us

Common mistakes we see

• Never filing Form 42A809. Kentucky tax gets withheld all year and has to be recovered on a 740-NP-R.
• Assuming reciprocity covers everything. Side business income, Kentucky rentals, and casino winnings are not covered.
• Forgetting local occupational tax. It is a separate obligation and is not refunded by the state return.
• Claiming the Indiana credit for reciprocal wages. No credit applies to wages Kentucky does not tax.
• Moving mid-year without part-year returns. A move across the river changes which state taxes what, and when.

How the engagement works

Before any work begins, you receive an engagement letter that spells out exactly which federal, state, and local returns we will prepare. Bring your documents to our office at 1102 E Virginia Street in Evansville, drop them off, or upload them through our secure client portal. How We Work explains each option.

We prepare your federal, Indiana, and Kentucky returns together so the credits and withholding line up, then review the results with you before anything is filed. If an Indiana or Kentucky notice arrives later, our notice help and representation service covers it. More answers are on our FAQ page.

Written and reviewed by Jeremy Roman, EA, owner of R Tax Services and an Enrolled Agent licensed by the IRS. This page is general information, not advice for your specific situation.