EDIT
Sorry for the unclear question - been staring at tax forms all night.
I meant to say that I live in a municipality in Ohio that charges local income taxes. It looks like my local municipality in Ohio is charging me income taxes on profits from a rental properties I have in Indiana.
Can they do that??
Frequently neighboring states reach an agreement that allow only the state where you live to levy taxes on income. The state where you earn that income doesn't tax you, and doesn't even require you to file any forms. These agreements are done by specific states, and they generally share a border.
But, you will still end up counting all the income you receive as income earned in your home state. If you live in the state with the lower tax rate that makes you very happy, because you will save money. Even if you don't save money you save time because you don't have to fill out tax forms for both states.
If there is no agreement between your two states, then generally you will only count the income where it is earned. Of course you will only be taxed once, and the other state will either ignore it, or give you a credit for the income tax paid to the other state.
In some states local jurisdiction: cities, towns, counties also have income taxes. If they do they will be taxing you on all your income that is taxed by your state.
Yes. Each state can choose its own threshold, for example, I live in Massachusetts, but have a rental in Connecticut. If the gross rent were over $20K, I'd need to file a CT return. I'd imagine some states are far lower or even require a tax at any level.
Responding to OP's edit/clarification. I never questioned that my state would charge me tax on my income regardless of source. That was expected. My own question was if the state where the property was located would charge as well.
