Yes, Indiana Does Impose State Income Tax—Here's What Residents and Nonresidents Should Know

Indiana levies a state income tax on both residents and those earning income from Indiana sources. If you live in Indiana or earn income within the state, you’ll likely owe taxes. Understanding the tax structure, available deductions, and credits can help you plan your finances more effectively.

Understanding Indiana’s Current Income Tax Rate and Structure

Indiana applies a uniform tax rate to all individuals, regardless of income level. The state’s income tax operates on a flat-rate system, meaning everyone pays the same percentage. This differs from the federal system, which uses graduated tax brackets based on income levels.

The uniform state income tax rate is 3.23%. Additionally, Indiana charges a sales tax of 7% on most retail transactions. This combined approach creates the state’s primary revenue sources. Property taxes in Indiana are set at the local level rather than statewide, so rates vary depending on your county and municipality.

Tax Deductions Available to Indiana Residents

Indiana offers several categories of deductions designed to reduce your taxable income:

Housing-Related Deductions

Renters can deduct up to $3,000 of annual rent paid for their primary residence. This deduction applies only to your main dwelling—summer homes, vacation properties, and student housing don’t qualify. Additionally, if your rental property is owned by a government entity, nonprofit organization, or cooperative, the rent is ineligible for this deduction.

Homeowners with mortgages or property tax obligations can deduct up to $2,500 of Indiana property taxes paid on their principal residence. This deduction is limited to your primary home only.

Education-Related Deductions

Families with children in private schools or pursuing homeschooling can claim $1,000 per child as a deduction. This applies to dependent children and helps offset education costs.

Special Circumstances Deductions

If you received unemployment benefits during the tax year, Indiana may allow you to exclude a portion of that compensation from state taxation. To claim this deduction, you’ll need to submit your 1099-G form along with your return. The IT-40 instruction booklet provides worksheets to calculate the exact deduction amount.

Individuals who retire on disability before the end of the tax year may qualify for the disability retirement deduction. You must be permanently and totally disabled at the time of retirement, and the maximum deduction is $5,200. Schedule IT-2440 contains the necessary worksheets for calculating your specific deduction.

State and Local Tax Credits You Can Claim

Beyond deductions, Indiana residents may qualify for various tax credits that directly reduce the amount of tax owed:

Earned Income Credit

Taxpayers who claimed a federal earned income tax credit can also claim Indiana’s version. The income thresholds for eligibility depend on your household composition:

• Individuals with no children must be between 25 and 64 years old and earn less than $15,900
• Single parents with one dependent child earning under $42,100 qualify
• Families with two or more dependent children and income below $47,900 may apply

Dependents generally must be under 19 (or under 24 if attending college). The maximum Indiana earned income credit reaches $538. The IT-40 instruction booklet includes worksheets starting on page 34 to help calculate your credit eligibility.

Adoption Credit

Parents who adopted children and claimed a federal adoption credit can also claim Indiana’s adoption credit. You may claim the lesser of 10% of your federal credit per child or $1,000 per child. Worksheet B in the IT-40 instruction booklet walks through the calculation process.

Education Savings Plan Credit

Contributions to CollegeChoice 529 education savings plans generate a state tax credit equal to your contribution amount. This encourages families to save for higher education expenses.

Educator Expense Credit

Teachers, librarians, counselors, principals, and superintendents working in Indiana public K-12 schools can claim a credit for classroom supply expenses. The maximum credit is $100 per individual, or $200 for married couples filing jointly if both spouses qualify (limited to $100 per spouse).

Senior Citizen Credit

Residents age 65 or older can claim the unified tax credit for the elderly if their income falls below $10,000. The credit ranges from $40 to $140 depending on income level. Form SC-40 includes a worksheet on the second page for determining your eligibility and credit amount.

Who Must File and Pay Indiana Income Tax

Not everyone in Indiana is required to file a state return. Your filing obligation depends on your residency status and income source.

Residency Considerations

You’re considered an Indiana resident if you live in the state either full-time or for any part of the year. Full-year and part-year residents must file Indiana returns if they have taxable income from Indiana sources.

Residents of neighboring states present an important exception. If you live in Kentucky, Michigan, Ohio, Pennsylvania, or Wisconsin but earn income in Indiana, you don’t owe Indiana state income tax. Instead, you only pay income tax to your home state. This reciprocal arrangement prevents double taxation for workers crossing state lines.

Nonresidents who earn income from Indiana sources—whether from employment, business operations, or other Indiana-based activities—must also file and pay Indiana state income tax.

Other State Taxes in Indiana

Beyond income tax, Indiana residents encounter additional tax obligations:

Capital Gains Taxation

Indiana taxes capital gains at the same rate as ordinary income: 3.23%. Whether you sell investments at a profit, real estate, or other assets, the gain is subject to this uniform tax rate alongside other income.

Property Tax Exemptions

Organizations using their property for educational, literary, scientific, religious, or charitable purposes may qualify for property tax exemptions. These exemptions apply at the local level and vary by jurisdiction.

No Inheritance or Estate Tax

Unlike some states, Indiana does not impose an inheritance tax or estate tax. This means transfers of assets to heirs and estate distributions aren’t subject to additional state-level taxation.

Understanding Indiana’s complete tax picture—income tax rates, available deductions, qualifying credits, and filing requirements—helps residents make informed financial decisions and ensure compliance with state obligations.