Indiana has a state income tax, and it applies to most residents and workers

Yes, Indiana charges a state income tax. The current rate is a flat 3.15 percent on federal taxable income, which means everyone in the state pays the same percentage regardless of how much they earn. This is one of the lowest state income tax rates in the country, but it still applies to wages, self-employment income, interest, dividends, and other sources of income.

Indiana's tax is collected by the Indiana Department of Revenue. If you work in Indiana or live there, you will owe this tax unless you fall into a specific category of exemption—such as certain retirees or people whose income comes entirely from sources the state does not tax.

Key Takeaways

  • Indiana's state income tax rate is a flat 3.15 percent on federal taxable income for all taxpayers.
  • You owe Indiana income tax if you are a resident, work in the state, or receive income from Indiana sources, even if you live elsewhere.
  • Certain types of income—including Social Security benefits, military pensions, and some retirement distributions—are exempt from Indiana tax.
  • Indiana has no state sales tax on groceries, but does tax most other purchases at rates between 5 and 7 percent depending on your county.

Who has to pay Indiana income tax

You owe Indiana income tax if you are a full-year resident of the state. This includes anyone who lived in Indiana for the entire tax year, even if you moved there partway through. If you moved to Indiana during the year, you owe tax on income earned after you arrived.

You also owe Indiana income tax if you do not live in the state but earned income from an Indiana source—such as wages from an Indiana employer, self-employment income from an Indiana business, or rental income from Indiana property. Non-residents file a different form than residents and only report Indiana-source income.

If you worked in Indiana but lived in another state, that other state may also claim the right to tax your wages. Most states have reciprocal agreements that prevent double taxation, but you may need to file in both states and claim a credit on one return for taxes paid to the other.

Types of income that are taxed and exempt

Indiana taxes wages, salaries, self-employment income, interest, dividends, capital gains, rental income, and most other forms of income at the 3.15 percent rate. If you received a W-2 from an employer or reported self-employment income on a Schedule C, that income is taxable in Indiana.

Several categories of income are exempt from Indiana state tax. Social Security benefits are not taxed. Military pensions and some other government pensions receive preferential treatment—military retirement pay is fully exempt, and other public employee pensions may be partially or fully exempt depending on when you retired and your age. Distributions from certain retirement accounts, including some IRA and 401(k) withdrawals, may also be exempt if you meet age and other requirements.

Interest and dividends from investments are taxable, but Indiana allows a deduction for a portion of these earnings if your total income is below certain thresholds. The deduction phases out as income rises, so higher earners receive less benefit.

How Indiana income tax is withheld from paychecks

If you work for an Indiana employer, your employer withholds Indiana income tax from each paycheck based on the W-4 form you complete. The withholding is calculated on your federal withholding, adjusted for Indiana's 3.15 percent rate. Your employer sends the withheld tax to the Indiana Department of Revenue on your behalf.

You can adjust your withholding by filing a new W-4 with your employer if you believe too much or too little is being withheld. If you have a second job, work as a contractor, or have other income sources, you may need to make estimated tax payments to Indiana four times per year instead of relying on withholding.

Self-employed people and business owners calculate their own Indiana income tax liability and typically pay it through estimated payments or when they file their annual return. The calculation is based on your net self-employment income after business deductions.

Indiana sales tax and other state taxes

Indiana also has a state sales tax, but the rate varies by county. The base state sales tax is 6 percent, but some counties add a local option tax that can raise the total to 7 percent or higher. Groceries are exempt from sales tax in Indiana, which is one reason the state's overall tax burden on low-income households is relatively lower than in states that tax food.

Indiana does not have a state estate tax or inheritance tax, which means money you leave to heirs is not subject to a separate state tax at death. The state also does not tax retirement income as heavily as some neighboring states—military pensions and some other retirement income receive full or partial exemptions.

Property taxes in Indiana are set by local counties and vary widely. The state assesses property at 35 percent of market value, but the tax rate applied to that assessed value differs by location. Some counties have significantly higher property tax burdens than others.

Filing your Indiana state income tax return

Most Indiana residents file their state return using Form IT-40, the Indiana individual income tax return. You file this return with the Indiana Department of Revenue, usually at the same time you file your federal return. The important date is typically April 15, the same as the federal important date, though you can request an extension.

If you are a non-resident who earned Indiana-source income, you file Form IT-40NR instead. This form reports only the income you earned from Indiana sources, not your total income from all states. Non-residents often have a more complex filing situation because they may owe tax to multiple states.

Indiana allows you to file electronically through approved software or through a tax professional. The state also offers free filing options for lower-income residents through the Volunteer Income Tax information (VITA) program, which operates at libraries and community centers throughout the state.

Deductions and credits available in Indiana

Indiana allows you to claim the standard deduction or itemize deductions, just as you do on your federal return. The state uses federal taxable income as the starting point, so your Indiana tax is calculated on the same income figure you report to the IRS. This simplifies the filing process because you do not have to recalculate deductions separately for the state.

Indiana offers a child and dependent care credit for certain childcare expenses, and a property tax deduction for homeowners. The state also provides credits for taxes paid to other states if you worked in multiple states during the year, which prevents you from being taxed twice on the same income.

Some taxpayers may be able to claim a credit for taxes paid to another state on income that Indiana also taxes. This credit is limited to the lesser of the tax you paid to the other state or the Indiana tax on that income, so it does not create a refund but prevents double taxation.

Frequently Asked Questions

Do I have to file an Indiana return if I only lived there part of the year?

If you moved to Indiana during the year, you file as a part-year resident and owe tax only on income earned after you arrived. If you moved out of Indiana, you owe tax only on income earned before you left. You will need to report the date you moved and calculate your income for only the months you were a resident.

What happens if I work in Indiana but live in Ohio or Kentucky?

You owe Indiana income tax on wages earned in Indiana. However, Ohio and Kentucky both have reciprocal agreements with Indiana that may allow you to claim a credit on your home state return for taxes paid to Indiana. You typically file in both states but claim a credit to avoid paying tax twice on the same income.

Is military retirement pay taxed in Indiana?

No. Indiana fully exempts military retirement and pension income from state income tax. This applies to anyone receiving a pension from the U.S. Armed Forces, regardless of when they retired or their current age. Other government pensions may be partially exempt depending on your age and when you retired.

Can I deduct federal income tax paid from my Indiana return?

No. Indiana does not allow a deduction for federal income taxes paid. Your Indiana tax is calculated on federal taxable income, but you cannot reduce that income further by the amount of federal tax withheld or paid.

What if I owe Indiana income tax but cannot pay it all at once?

The Indiana Department of Revenue offers payment plans for taxpayers who cannot pay their full balance when they file. You can request a plan by contacting the department directly or through their website. Interest and penalties continue to accrue on unpaid balances, so paying as much as you can upfront reduces the total amount you will owe.