Indiana for retirees: Social Security is free, the pension and the IRA are not

Indiana taxes retirement income. Social Security is the exception: whatever part of it was taxed federally comes off in full on Schedule 2, at any age and any income. Military retirement pay comes off in full as well. But a pension, a traditional IRA or 401(k) withdrawal, an annuity from an employer plan or a Roth conversion is taxed at the flat 2.95% state rate plus your county’s rate, on the same return and in the same year as a working person’s wages. There is no general retirement exclusion and no age-based pension break. What Indiana gives for age is modest: a $1,000 exemption at 65, another $500 if federal AGI is under $40,000, and a credit of $40 to $140 for those with almost no income. A retired couple in Marion County with $50,000 of pension and IRA income will owe about $2,300 between the state and the county. Plan on it.

The reason is the shape of the return. Form IT-40 starts from federal adjusted gross income, which already contains the taxable part of Social Security, pensions and IRA distributions. Schedule 2 then deducts specific items, and Social Security is on the list. Pensions and IRAs are not.

What comes off, and what stays in

Every item that stays in line 1 is taxed at 2.95% plus the county rate set by where you lived on January 1: 4.05% combined in Hamilton County, 4.97% in Marion.

Social Security. The deduction is of the federally taxable amount, which is what is in AGI to begin with. If $30,600 of a $36,000 benefit is taxed federally, $30,600 is what comes off, and the Indiana tax on it is zero. Railroad Retirement benefits are treated the same way.

Military retirement. Since 2022 Indiana deducts 100% of military retirement pay and survivor benefit payments. Active-duty, National Guard and reserve pay are deducted as well, so a career service member who retires here pays Indiana tax only on civilian wages, IRA withdrawals and investment income.

Civil service annuities. A retired federal employee aged 62 or older, or a surviving spouse of any age, deducts up to $16,000 of the taxable annuity, but the $16,000 is reduced dollar for dollar by any Social Security or Railroad Retirement benefits received that year. A CSRS retiree who never paid into Social Security gets the full $16,000; a FERS retiree with $18,000 of Social Security gets nothing from this line, though the Social Security itself is still deducted in full.

Everything else is taxed. A teacher’s pension, a corporate pension, a police or fire pension, a 401(k) drawn down over retirement, required minimum distributions: all of it stays in Indiana income. So does a pension earned in another state and paid to a new Indiana resident; federal law bars the former state from taxing it, and Indiana does. Indiana has no early-withdrawal penalty of its own.

Roth conversions: the state and county cost

A Roth conversion is a distribution from a traditional IRA deposited in a Roth, taxable federally in the year of the conversion. In Indiana the converted amount is in federal AGI, nothing takes it out, and it is taxed at 2.95% plus the county rate. A $100,000 conversion by a Marion County resident costs $2,950 in state tax and $2,020 in county tax, $4,970 in all, on top of the federal tax. That does not make a conversion a bad idea; it means the Indiana cost belongs in the arithmetic. The Roth withdrawals later are tax-free everywhere, including Indiana. Two Indiana angles: the state rate falls to 2.9% for 2027, so a conversion spread across years costs slightly less each year; and the conversion counts toward the $40,000 AGI test on the $500 age exemption. Federally, a conversion also raises the taxable share of Social Security and can raise Medicare premiums two years later; see IRMAA.

The exemptions for age, and the federal senior deduction

Indiana has no standard deduction. In its place are exemptions on Schedule 3: $1,000 for you, $1,000 for a spouse on a joint return, $1,000 more for each person 65 or older, $1,000 for blindness, and a further $500 for each person 65 or older if federal AGI (IT-40 line 1) is under $40,000, or $20,000 married filing separately. A retired couple both over 65 with AGI under $40,000 claims $5,000; over $40,000, $4,000. At a combined 4.5% rate, the whole $5,000 is worth about $225.

The $6,000 federal senior deduction, in effect for 2025 through 2028 for people 65 and older, is taken below the AGI line alongside the standard deduction. Indiana starts from AGI, enacted no matching deduction when it updated its tax code in March 2026, and has issued no guidance that mentions one (verify). The deduction therefore never reaches the Indiana return, and neither does the extra standard deduction for age. A retiree who owes no federal tax because of them can still owe Indiana several hundred dollars on the same pension.

The Unified Tax Credit for the Elderly

For retirees with almost no income beyond Social Security there is a small refundable credit. If you or your spouse were 65 by December 31, lived in Indiana at least six months of the year, and have federal AGI under $10,000, the credit is $100 for a single or widowed person (or a couple with one spouse over 65) with income under $1,000, $50 with income from $1,000 to $2,999, and $40 from $3,000 to $9,999. A couple both over 65 gets $140, $90 or $80 on the same bands. Someone below the filing threshold claims it on the one-page Form SC-40, which has its own lower cutoffs ($2,500 single, $3,500 married with one spouse over 65, $5,000 both over 65); above those, file an IT-40 and claim it on Schedule 5. Many retirees living on Social Security alone qualify and never file for it. A past year can be claimed within three years of its due date.

Withholding and estimated payments

Because pensions and IRA withdrawals are taxed, a retiree needs Indiana tax paid in on them during the year, and most payers do not withhold Indiana tax unless asked. The underpayment penalty on Schedule IT-2210 applies when the tax owed after withholding and credits is $1,000 or more. The fixes are to ask the pension administrator or IRA custodian for Indiana withholding, or to make four estimated payments on Form ES-40, due April 15, June 15, September 15 and January 15: taxable pension and IRA income, less exemptions, times the combined rate, divided by four. Payers that withhold Indiana state tax do not always withhold the county tax.

Property tax relief: at the courthouse, not on the return

Indiana’s help for seniors is mostly on the property tax bill, and none of it is claimed on Form IT-40. Senate Enrolled Act 1 (2025) rewrote the homestead program starting with bills payable in 2026.

Figures from the Department of Local Government Finance memo on SEA 1 (June 2025). Counties may carry existing over-65 deduction recipients over to the new credit automatically; confirm with your auditor. A homestead’s bill is also limited by the constitutional 1% cap on assessed value.

The income test for the over-65 credit and the circuit breaker is adjusted gross income, which includes the taxable part of Social Security and all pension and IRA income. The one piece of property tax relief on the income tax return is the Schedule 2 deduction of up to $2,500 of property tax paid.

Moving in, moving out

A retiree who moves to Indiana starts paying Indiana tax on the pension and IRA payments received after the move; federal law gives the taxing right to the state of residence when the payment is received. A retiree who leaves does the reverse, and the move-year Form IT-40PNR reports each payment to the state where the retiree lived when it arrived. Residency and the part-year return are in Moving to Indiana. One thing a retiree does not need to plan around: Indiana has no inheritance tax (repealed for deaths after December 31, 2012), no estate tax and no gift tax.