How Indiana income tax works: AGI, $1,000 exemptions, 2.95% plus your county

Indiana charges two income taxes on one return. The first is the state tax, a flat 2.95% for 2026 on Indiana adjusted gross income, which is federal AGI with a few things added and a few things taken out. The second is the county tax, figured on the same income on Schedule CT-40 at the rate of the county you lived in on January 1, anywhere from 0.5% to 3.0%. Marion County is 2.02%, so an Indianapolis resident’s real rate is 4.97%. There is no standard deduction and no itemizing. In their place are $1,000 exemptions, a renter’s deduction, a homeowner’s property tax deduction, and the full subtraction of Social Security. Everything the federal return does below the AGI line is invisible here, with three exceptions the legislature wrote for 2026 only: tips, overtime and car loan interest.

A federal adjustment taken above the line, an IRA contribution, a health savings account deposit, half of self-employment tax, flows through and cuts Indiana tax too. A federal deduction taken below the line does nothing here unless the General Assembly passes a matching Indiana deduction. And because the county tax rides on the same base, every dollar in Indiana AGI is taxed twice.

Who files

A full-year resident files Form IT-40 and reports all income, wherever it was earned. A part-year resident or a nonresident with Indiana income files Form IT-40PNR. A resident of Kentucky, Michigan, Ohio, Pennsylvania or Wisconsin whose only Indiana income is wages files the short Form IT-40RNR, owes no Indiana state tax on the wages under the reciprocal agreements, and may still owe county tax; that is covered in Moving to Indiana. A return is due when gross income exceeds your exemptions, $1,000 for a single person with no dependents, so nearly everyone with a job files.

Where it starts: federal AGI

Line 1 of the IT-40 is federal adjusted gross income, line 11 of Form 1040. Adjusted gross income is income after the adjustments on federal Schedule 1 but before the standard deduction and everything that follows it. So the federal standard deduction, $32,200 joint for 2026, never reaches Indiana. Neither do itemized deductions, the extra standard deduction for age, the $6,000 senior deduction, or the 20% qualified business income deduction. None of them need an Indiana add-back, because none of them were ever taken out.

The federal deductions for tips, overtime and car loan interest are below the line too. Senate Enrolled Act 243, signed March 5, 2026, created three separate Indiana deductions equal to the federal amounts, for tax year 2026 only; they expire unless the 2027 session renews them. See What is new in Indiana for 2026.

The add-backs

Schedule 1 adds a short list of items back to AGI. For most wage earners there are none.

Bonus depreciation. Indiana does not follow federal bonus depreciation under section 168(k), nor the new 100% allowance for qualified production property under section 168(n). A sole proprietor, landlord or farmer who claimed bonus depreciation federally adds it back and depreciates the asset under the regular schedule instead. Section 179 expensing is capped at $25,000 for Indiana, so anything expensed above that federally is added back as well.

Indiana also does not follow the federal section 163(j) business interest limit. The remaining add-backs, pass-through items and a few recaptured deductions, are listed on Schedule 1 by three-digit code.

The deductions: Schedule 2

There is no standard deduction, so these are the only general deductions a household has.

Dollar limits are set by statute and are not indexed. The 2026 Schedule 2 had not been published when this was written, and the Department has not said where the three 2026-only deductions will appear.

The renter’s deduction is the one most often missed, because the federal return never asks about rent. Up to $3,000 of rent paid on your principal residence comes off, which at 2.95% plus a 2% county rate is worth about $150 a year. You need the landlord’s name and address; rent on a property exempt from property tax does not qualify.

Social Security comes off in full on lines 5 and 6, whatever part of it was taxed federally. Pensions and IRA withdrawals do not. Indiana has no general retirement income exclusion, which is the point of Indiana for retirees.

The exemptions: Schedule 3

After the deductions come the exemptions. $1,000 for you and $1,000 for your spouse on a joint return. $1,000 for each dependent, plus $1,500 more for each dependent child under 19 (or a full-time student under 24), so a child is worth $2,500. In the first year you claim a child the extra is $3,000 instead of $1,500, and an adopted child earns a further $3,000. Age 65 or older adds $1,000 per person, blindness adds $1,000, and a person 65 or older with federal AGI under $40,000 ($20,000 married filing separately) gets another $500. None of these figures are indexed. A married couple with two school-age children claims $7,000; a retired couple both over 65 with AGI under $40,000 claims $5,000. There is no phase-out at any income.

The rate, and the second rate

Indiana AGI less exemptions is state taxable income. Multiply by 2.95% for 2026 and that is the state tax. The rate was 3.0% for 2025 and drops to 2.9% for 2027. Wages, interest, dividends, capital gains and lottery winnings are all taxed at the same rate; there is no preferential rate for gains and no deduction for gambling losses.

Then Schedule CT-40 applies the county rate to the same state taxable income. All 92 counties levy a county income tax. The rate is set by the county where you lived on January 1, 2026, or, if you lived outside Indiana, the county where you worked that day. A move in March does not change your county for the year. Under the rate chart effective October 1, 2026 the rates run from 0.5% in Porter County to 3.0% in Randolph; Marion is 2.02%, Hamilton 1.1%, Lake 1.5%, Allen 1.59%, St. Joseph 1.75% and Vanderburgh 1.25%. Counties can change rates each January 1 and October 1, and the chart for January 1, 2027 is to come. It is figured on the same return, paid with the same check and withheld by the same employer, and it is usually between a third and a half of the total bill.

The credits

Schedule 6 holds the offset credits, which reduce tax but cannot produce a refund by themselves. Schedule 5 holds the refundable items: withholding, estimated payments, the earned income credit and the Unified Tax Credit for the Elderly.

The Indiana529 credit is the one worth planning around: twenty cents back on every dollar contributed, up to $1,500 a year, claimed by whoever makes the contribution, and Indiana K-12 tuition paid from the account counts. The earned income credit and the family items are in Credits and breaks for Indiana families. There is no state child tax credit and no child care credit; the $2,500 exemption per child is what Indiana offers instead.

Withholding and estimated payments

Indiana withholding is set by Form WH-4, which asks for your exemptions and, on separate lines, your county of residence and county of work as of January 1. Both rates matter: the employer withholds the state tax and the county tax of the county you list. Lines 9 and 10 let you add a flat extra amount of state or county withholding, the simple fix for a two-job household or a retiree with a taxed pension.

Anyone who expects to owe $1,000 or more after withholding and credits makes estimated payments on Form ES-40, due April 15, June 15 and September 15, 2026 and January 15, 2027. The underpayment penalty is figured on Schedule IT-2210, and is avoided by paying in at least 90% of this year’s tax or 100% of last year’s, 110% if last year’s federal AGI was over $150,000 ($75,000 married filing separately). The people usually caught are the self-employed, landlords, and anyone with a large IRA withdrawal or a sale, since none of that income is withheld on.

How to file

Most Indiana returns are e-filed with the federal return, and the refund arrives separately, typically in 10 to 14 business days. INfreefile offers free federal and Indiana filing through several vendors under income limits that vary by vendor (about $51,000 to $89,000 for the 2025 season; 2026 limits to come). INTIME, the Department’s online account, handles payments, refund status and letters. The return is due April 15, 2027. Form IT-9, or a federal Form 4868 extension, extends filing to mid-November 2027 but not payment: pay at least 90% by April 15 to avoid the penalty. An amended return is a new IT-40 with the amended box checked (there is no separate IT-40X form), and since SEA 243 you have one year, not 180 days, to report a federal change. Dates and forms are in Indiana calendar and forms.

What trips people up

• The wrong county on the WH-4, or no county at all, so the county tax arrives unwithheld in April.
• A mid-year move treated as a change of county. The January 1 county controls the whole year.
• The renter’s deduction left off because nobody asked about rent.
• A pension or IRA withdrawal assumed to be exempt like Social Security. It is taxed in full.
• The federal senior deduction expected to reduce Indiana tax. It never reaches the return.
• Bonus depreciation or Section 179 above $25,000 on a Schedule C or E carried into Indiana with no add-back.