Yeah, she should be taxed on the income only once. From what I've read it looks like income should be recorded on both state's returns, but credited on the state she is a resident in and taxed in the state which she earned the money. (You'll recall how Al Franken ran into trouble during his Senate run because he had claimed all his income in the state where he was a resident, NY, so he had to file amended returns in all the states where he had collected income in previous years).
Turbotax's website has links to the Illinois forms for claiming a credit on tax paid in other states here
Rob, on Illinois' tax website they had the actual form
. On page 4 there is kind of a FAQ section that says the following:
What if I earn income in Iowa, Kentucky,
Michigan, or Wisconsin?
If you earned wages, salaries, tips, or other employee
compensation from an employer in Iowa, Kentucky, Michigan, or
Wisconsin while you were a resident of Illinois, you are covered by
a reciprocal agreement between that state and Illinois and are not
taxed by that state on your compensation. However, you may be
taxed on other income.
If your employer withheld taxes or you paid tax to these states on your
compensation, you must claim a refund from that state. You may not
claim a credit on Schedule CR for that tax. You must fi le the appropriate
forms with that state to receive a refund of taxes withheld in error.
The reciprocal agreements do not prohibit subdivisions of these
states from imposing a tax on your compensation. For example, if you
were subject to tax by a city in Kentucky while you were an Illinois
resident, you may claim a credit for that local tax.
In addition, because of differences in state laws, you may be
considered a resident by one of these states and required to pay their
income taxes, even though you are an Illinois resident under Illinois
law. In that case, you may claim a credit for the taxes paid.
Not sure, but I think that means if the income was shown on a W-2 you only need to claim it in Illinois because of the agreement with Michigan. Otherwise it looks like you should claim it in both states, but also claim the credit in Illinois for the tax paid in Michigan.
Disclaimer: I'm not an accountant or a lawyer, so please don't sue...