United States

Indiana extends credits for local income taxes as a result of Wynne

Becomes latest state to address out-of-state local income tax credits


As a result of the United States Supreme Court’s decision in Comptroller of the Treasury v. Wynne, a number of states have issued guidance regarding claiming refunds or credits for out-of-state local income taxes. Indiana is the latest state to address a potential internal consistency in its taxing statutes regarding the treatment of local income tax credits.

Wynne Background

On May 18, 2015, the United States Supreme Court issued its decision in Wynne, finding that Maryland’s practice of allowing a credit for personal incomes taxes paid to other states against Maryland state income tax, but not allowing a credit for county-based taxes was unconstitutional.

Maryland imposes a personal income tax on the income its residents earn both within and outside the state, and provides a credit to its residents for income taxes paid to other states. Maryland also imposes a state-administered county-level tax. The issue presented in Wynne was that a resident could use his or her credit for income taxes paid to other states to offset state level tax, and not the county-level tax. Accordingly, a Maryland resident taxpayer with a credit for income taxes paid to other states that exceeds his or her state-level tax gets no benefit from the excess credit to offset the county-level tax, and is, therefore, economically disadvantaged against a similarly situated taxpayer who only did business within Maryland.

The Court found that Maryland's tax structure imposed an unconstitutional burden upon interstate commerce – one that could be cured by either providing a credit to residents for taxes paid to other states or by removing the state tax on nonresidents. Since Maryland's tax structure failed to provide the requisite credit and imposed such a tax on nonresidents, it could not pass the internal consistency test and was an unconstitutional tariff. For more information on the Wynne decision, please see our alert, U.S. Supreme Court issues Wynne ruling.

Due to the limited and specific nature of Maryland’s taxing structure, it was not immediately clear how much of an impact Wynne would have on other jurisdictions’ taxing schemes. However, several states have since provided guidance on various local personal income taxing schemes that are similar to the facts in Wynne. In 2015, Iowa provided guidance on individual income tax refunds pursuant to a local school district income surtax that effectively permitted a credit against state income taxes but not local income taxes. Kansas also provided formal guidance regarding the application of credits for income taxes imposed by out-of-state local governments. For more information on the Kansas guidance, please read our alert, Kansas DOR provides guidance in response to Wynne.

More recently, the Indiana Department of Revenue released Commissioner’s Directive #57, extending credits for out-of-state local income taxes prior to Jan. 1, 2015 as a result of Wynne.

Indiana Treatment

Prior to Jan. 1, 2015, Indiana’s taxing scheme was not too dissimilar to that of Maryland’s as addressed in the Wynne decision. While permitting a credit against Indiana state income taxes for out-of-state income taxes paid, a credit was not statutorily provided to permit out-of-state local income taxes paid to offset Indiana local income taxes. Many Indiana counties impose a county economic development income tax (CEDIT) which is locally imposed on the adjusted gross income of county taxpayers.

Effective Jan. 1, 2015, Indiana enacted statute section, Ind. Code section 6-3.5-7, providing a credit of local out-of-state tax paid against Indiana county economic development income tax (CEDIT). In consideration of the Wynne decision, the Indiana Department of Revenue determined that a credit for out-of-state local income taxes would be permitted against the CEDIT prior to 2015. Taxpayers that have paid out-of-state local income taxes may file a refund claim or take a credit on the Indiana return against CEDIT tax paid prior to Jan. 1, 2015. The state’s three year statute of limitation applies.

According to the Department’s guidance, the amount allowable as a credit shall be no greater than:


The out-of-state local income tax liability on the adjusted gross income taxed by a non-Indiana locality, reduced by the credit permitted under Ind. Code section 6-3.5-1.1-6 or Ind. Code section 6-3.5-6-23 on that same income, or


The amount the taxpayer's CEDIT liability would have been reduced by eliminating the adjusted gross income taxed by a non-Indiana locality from the taxpayer's Indiana adjusted gross income,

whichever is less.

The Department will not grant a credit of out-of-state local income taxes absent sufficient documentation that the individual actually paid the tax.


Indiana is the third state to issue formal guidance regarding credits for out-of-state local income tax paid since the Wynne decision. Taxpayers should be aware of these refund opportunities and file refunds or credits before the statutes of limitations lapse.



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