Who Must File

• If you earned income in Illinois, you must file state income taxes if you file a federal return or if your base income exceeds the Illinois exemption allowance. Your exemption is $2,000 for each claimed on a federal income tax return, plus $1,000 if you or your spouse is legally blind or 65 or older.
  
  Indiana residents must file state income taxes if their income exceeds their exemptions. Non-residents must file if they earned any income in Indiana. Your Indiana exemption is equal to $1,000 for every exemption claimed on your federal income tax return, plus $1,000 if you are legally blind or 65 or older.
  
  

Tax Rate

• As of 2011, the income tax rate in Illinois is 5 percent. The income tax rate in Indiana is 3.4 percent, but you also owe county taxes, which vary by county. Tax returns for both states are due on the same day as federal income tax returns. If you cannot file and pay your taxes by the due date, both states allow you to file due date extensions.
  
  

Penalties

• In Illinois, if you do not file your taxes when they are due, you will receive a notice of non-filing. If you do not file within 30 days, you will owe a penalty of $250 or 2 percent of taxes due, whichever is greater, as of 2005. If you underpay your taxes, you will be charged 4 percent interest on the unpaid amount as of 2010. Finally, you will be charged $25 for bad checks as of 2005.
  
  In Indiana, as of 2011, if you fail to file your taxes within 30 days of receiving a notice that your return is past due, you will be charged a penalty fee of 20 percent of your taxes. If you file your return, but underpay your taxes, you will be charged 9 percent interest on the unpaid amount. In addition, if your check or credit card does not clear, you will be charged a 10 percent penalty of the amount of your check.
  
  

Reciprocal Agreements

• Both states have reciprocal agreements with other states. Normally, if you live in one state and work in another, you have to file and pay taxes in both states. However, if you live in a state that has a reciprocal agreement with the state in which you work, you only pay taxes in the state where you live.
  
  Illinois has reciprocal agreements with Iowa, Kentucky, Michigan, and Wisconsin. You must file Part 1 of Form IL-W-5-NR Employee's Statement of Non-residence in Illinois and file income taxes in the state where you live.
  
  Indiana has reciprocal agreements with Kentucky, Michigan, Ohio, Pennsylvania and Wisconsin. If you live in one of those states and work in Indiana, you must file an income tax return in your home state and Form WH-47 Certificate of Residence with Indiana.