Example: You earned wages in Louisville, KY. Your employer withheld a Louisville city (locality) tax. Since your wages were taxed by a non-Indiana locality (Louisville), you are eligible to take a deduction.
The deduction is limited. You may deduct the amount of your income that was taxed by a non-Indiana locality or $2,000, whichever is less. If you and your spouse both qualify, you may each claim the deduction for a maximum of $4,000 (limited to no more than $2,000 per person).
For more information see Income Tax Information Bulletin #28 at Indiana's Department of Revenue website.