OK, to begin with: most Americans are familiar with having three sets of income taxes withheld from their paychecks: federal, state, and local (either city or county.) In general, this has only meant two sets of tax forms because two of the three states I’ve lived in include the local tax on the state forms.
However, Indiana (where I now live) knocked me for a loop when I ran my numbers through the e-file software I used. I carefully entered my entire W2 plus the freelance income I made while I lived in IN plus the date I moved, and it spit out a refund of over $300. I was surprised, because I was expecting my moving-expenses deduction to more or less cancel out the freelance income, leading to a small refund if at all.
When I looked closely at the actual IN-40 the e-file software had filled out, I saw what had happened: for some reason it had entered a $0 for my county tax owed, even though my employer had withheld roughly the same amount from my paycheck as this theoretical refund was.
What was going on? I had no idea, but obviously I didn’t want to file incorrectly and have to refund my refund later (or worse get audited!), so I went to the actual Indiana Department of Revenue site to look at the forms for part-year residents. It turns out that there is a separate form for calculating county tax due; you fill it out and then transfer the amount owed to the state form. OK, whatever. I still didn’t know why the software was spitting out $0 and I was annoyed because it was looking like I might have to hand-file (God forbid) in order to get it right. Plus I was already missing my $300+ refund. Anyway, I opened up the county tax form for part-year residents to see what I might be dealing with, and it gave me two options: “If you lived in Indiana on Jan 1, 2014” and “If you lived in another state but worked in Indiana on Jan 1, 2014.”
Neither of these applied to me, since I both lived and worked in another state at the beginning of January. Now I was really annoyed, because where was the right form for me? I figured I’d better call and ask. Luckily it’s still early enough in the year that I only had to wait for about 5 minutes to talk to an actual human being. Unluckily, after I walked him through my problem, he had no more idea than me what I needed to do. Eventually, after looking at the same forms I’d been looking at, we had a brief dialogue.
Him: You know, I think you did it right — it really is $0.
Me: But surely you want some county tax from me?!
Him: I don’t know why, but I don’t think we do. I’ll make a note on your record that you called and we talked about this, though.
Me: Great, thanks. Can I get your name again just in case?
So, we hung up, and I almost just went ahead and filed. But I was still nervous about it. So I googled some more stuff (I’d tried google earlier but with different sets of terms) and lo and behold, it turns out that when you move to Indiana, even on January 2, you don’t owe any county tax for the entire year. If you move within Indiana, but to a different county, even on January 2, you pay county tax to your January 1 county for the entire year. Why? I have no idea. It makes basically zero sense to me. However, that’s apparently the law.
I discovered this by finding instructions for payroll software in Indiana, meant for employers. Maybe it’s also laid out explicitly somewhere in the instructions for the IN-40; my next step would probably have been to comb carefully through those. But a quick look didn’t turn that information up. Anyway, this payroll software instruction was meant for employers so that they would get this right…but my HR department apparently didn’t get the memo. Or maybe they did it on purpose? Because the end result here is that I’m actually quite happy. I’m getting a nice and wholly unexpected refund, AND I didn’t get a sudden shock with my first 2015 paycheck, when (if they’d only just started withholding the county tax) I would have been really surprised to suddenly find about $30 less per month than I was used to budgeting with.
So, there’s my story. How weird is that? Note to anyone moving to Indiana: try to do it in January to maximize your holiday from county tax!
*I had suspected I’d have a substantial federal refund, largely because my first employer withheld “too much” money given that I changed jobs to one with a lower salary mid-year.