Indiana State Tax: A Complete Guide to Filing Requirements, Rates, and Deductions

Understanding your Indiana state tax obligations is essential whether you’re a resident, nonresident, or someone working across state lines. Indiana maintains relatively straightforward tax rules compared to many other states, with a flat income tax rate and a range of deductions and credits available to eligible taxpayers.

Who Must File an Indiana State Tax Return

You’re required to file an Indiana income tax return if you are a resident who receives any income during the tax year or a nonresident earning income from an Indiana source. Residency is determined broadly—you’re considered a resident if you live in Indiana either full-time or for any portion of the year.

An important exception exists for residents of neighboring states: If you live in Kentucky, Michigan, Ohio, Pennsylvania, or Wisconsin and earn income in Indiana, you typically only pay state income tax to your home state, not to Indiana. This reciprocal arrangement helps prevent double taxation for cross-border workers.

Indiana State Tax Rates: Understanding the Flat Tax System

Indiana uses a uniform tax rate structure rather than progressive tax brackets. Every Indiana taxpayer pays the same state income tax rate of 3.23%, regardless of their income level. This flat rate applies to all ordinary income and is one of the defining features of Indiana’s tax system.

In addition to income tax, Indiana charges a sales tax of 7% statewide, though local jurisdictions may impose additional sales taxes. Capital gains are taxed at the same 3.23% rate as ordinary income.

Income Tax Deductions to Reduce Your Indiana State Tax Burden

Indiana offers several deductions that can significantly lower your taxable income:

Renter’s Deduction

If you rent your primary residence in Indiana, you can deduct up to $3,000 of your annual rent payments. Important limitations apply: the deduction only applies to your permanent residence, not to vacation homes, summer properties, or student housing. Additionally, if your landlord is a government entity, nonprofit organization, or cooperative, you cannot claim this deduction.

Homeowner’s Residential Property Tax Deduction

Homeowners can deduct up to $2,500 of property taxes paid on their principal residence in Indiana. This deduction recognizes the double burden of homeownership and helps offset your total state tax liability.

Private School and Homeschool Deduction

Taxpayers who have dependent children enrolled in private school or receiving homeschool education can deduct $1,000 per child on their Indiana income tax return. This deduction recognizes the educational expenses families incur outside the public school system.

Unemployment Compensation Deduction

If you received unemployment benefits during the tax year, Indiana may tax only a portion of those benefits, resulting in lower overall tax obligations than at the federal level. To claim this deduction, include your 1099-G form with your return. Refer to the IT-40 instruction booklet for a detailed worksheet to calculate your allowable deduction.

Disability Retirement Deduction

If you retired on disability before the end of the tax year and are permanently and totally disabled, you may deduct a portion of your disability retirement payments, up to a maximum of $5,200. Schedule IT-2440 provides a worksheet to help you determine your exact deduction amount.

Tax Credits: Direct Reductions to Your Indiana State Tax

Tax credits offer a more direct benefit than deductions, as they reduce your tax liability dollar-for-dollar rather than reducing your taxable income.

Indiana Earned Income Credit (IN-EIC)

Taxpayers who qualify for the federal Earned Income Tax Credit can also claim an equivalent credit on their Indiana return. Eligibility depends on your income level and number of qualifying dependents:

• Individuals with no qualifying children: income must be less than $15,900 (and you must be between 25 and 64 years old)
• Those with one qualifying child: income less than $42,100
• Those with two or more qualifying children: income less than $47,900

Qualifying dependents must generally be under age 19, or under 24 if enrolled as a full-time student. The maximum Indiana EIC is $538, calculated using worksheets provided in the IT-40 instruction booklet.

Adoption Credit

If you adopted a child and claimed an adoption credit on your federal tax return, you’re eligible to claim a corresponding credit on your Indiana return. The credit equals the lesser of 10% of your federal adoption credit or $1,000 per child. Use Worksheet B in the IT-40 instruction booklet to calculate your credit amount.

CollegeChoice 529 Education Savings Plan Credit

Indiana encourages education savings by allowing taxpayers who contributed to a CollegeChoice 529 plan to claim a credit for the amount of their contributions. This credit makes education planning more tax-efficient for families planning ahead for college expenses.

Public School Educator Expense Credit

Educators working in Indiana public K-12 schools qualify for a credit on classroom supply expenses. Teachers, librarians, school counselors, principals, and superintendents can all claim this credit, which maxes out at $100 per individual. When spouses both qualify and file jointly, each can claim up to $100, for a combined maximum of $200.

Unified Tax Credit for the Elderly

Taxpayers age 65 or older by the end of the tax year with income below $10,000 can claim a credit ranging from $40 to $140. Complete the worksheet on the second page of form SC-40 to determine your exact credit amount.

Property Taxes and Sales Tax in Indiana

Property tax rates in Indiana are set at the local level, not statewide. However, Indiana does offer property tax exemptions for organizations using their property for educational, literary, scientific, religious, or charitable purposes.

The statewide sales tax rate is 7%, applied consistently across the state for most purchases. As mentioned earlier, capital gains are taxed at your ordinary income tax rate of 3.23%.

No Inheritance or Estate Tax in Indiana

Indiana residents have an advantage over residents of many states: Indiana does not impose an inheritance tax or estate tax. This means that inherited assets and estates are not subject to additional Indiana state taxation, a benefit for both heirs and estate planning purposes.

Key Takeaways for Your Indiana State Tax Planning

Filing requirements for Indiana state tax depend primarily on whether you earn income from an Indiana source and whether you qualify as a resident or nonresident. With a flat 3.23% income tax rate, Indiana offers predictable tax calculations for all income levels. By taking full advantage of available deductions—from housing-related ones for renters and homeowners to education-related and earned income credits—you can substantially reduce your overall Indiana state tax obligation. Whether you’re a longtime resident or new to the state, understanding these rules and available benefits ensures you remain compliant while minimizing your tax burden.