What is new in Indiana for 2026: a lower rate, and tips and overtime deductible for one year

Three things change on the 2026 Indiana return. The state rate drops from 3.0% to 2.95%, one more step in a schedule that reaches 2.9% in 2027. Senate Enrolled Act 243, signed March 5, 2026 and retroactive to January 1, moves Indiana’s link to the federal tax code from January 1, 2023 to January 1, 2026, so the Indiana return now starts from a federal adjusted gross income that includes the 2025 federal changes. And because Indiana starts from AGI, the new federal deductions for tips, overtime and car loan interest, which come off after AGI, could not reach the Indiana return on their own; the same act wrote three Indiana deductions equal to the federal ones, good for tax year 2026 and no other. The federal senior deduction got no Indiana copy. The county income tax, the $1,000 exemptions, the renter’s deduction and the 529 credit are what they were.

The rate: 2.95% for 2026, 2.9% for 2027

The cut was set in 2023, when the legislature wrote a step-down schedule into the budget: 3.0% for 2025, 2.95% for 2026, 2.9% for 2027, and there it ends. Withholding moved on January 1, 2026 to match, so most wage earners have already had the cut a few dollars at a time; on $60,000 of Indiana AGI the full-year difference is $30.

The county income tax does not follow. It is a separate rate, 0.5% to 3.0% by the county where you lived on January 1, 2026, figured on Schedule CT-40 and paid with the state tax. A Marion County resident’s combined rate falls from 5.02% to 4.97%. The how-it-works article covers the county tax in full.

County rates are from Departmental Notice #1 effective October 1, 2026. Counties may change their rates each January 1 and October 1; the January 1, 2027 chart had not been issued when this was written, so the 2027 combined figures assume no county change.

Senate Enrolled Act 243: Indiana catches up to the federal code

Indiana ties its definition of income to the Internal Revenue Code as of a fixed date and updates that date by statute. For the 2025 return the date was January 1, 2023, so the 2025 federal law did not exist for Indiana except for three items picked up separately. SEA 243 moves the date to January 1, 2026, retroactive to the start of the year.

What that adopts is every 2025 federal change that happens above the AGI line: health savings accounts, the rules for Schedule C and rental income, the educator and student-loan-interest adjustments. What it does not adopt is anything below the line, because Indiana never gets there. The standard deduction, itemized deductions, the SALT cap, the qualified business income deduction, the non-itemizer charitable deduction and the four new federal deductions for tips, overtime, seniors and car loan interest all come off after the number Indiana copies onto line 1 of the IT-40.

SEA 243 keeps Indiana’s long-standing exceptions. Federal bonus depreciation is added back, and so is the new allowance for qualified production property under section 168(n); Section 179 expensing stays capped at $25,000; the section 163(j) business interest limit is not followed. A sole proprietor, landlord or farmer who takes 100% bonus depreciation on a 2026 purchase adds it back on Schedule 1 and recovers it through ordinary depreciation over the asset’s life.

Tips, overtime and car loan interest: deductible in Indiana, for 2026 only

This is the change most Hoosiers will notice. SEA 243 adds three deductions to the Indiana Code, IC 6-3-2-31, -32 and -33, each equal to the federal deduction for the same item and each available for tax year 2026 only. The Department of Revenue explained them in Information Bulletin #128 in June 2026. Where they land on the 2026 IT-40 is not known yet; the 2026 forms are to come. The mechanics, as the bulletin describes them:

Tips and overtime. The Indiana deduction is the federal deduction as finally allowed, from Schedule 1-A of the Form 1040 (line 13 for tips, line 21 for overtime), including any federal phase-out. If some of the tips or overtime were already exempt from Indiana tax, through the military pay deduction or because a nonresident earned them outside Indiana, the deduction is prorated so there is no double benefit. Spouses on a joint return may split the deduction between themselves, but neither may claim more than their own tips or overtime would support.

Car loan interest. A full-year resident deducts the federal amount from Schedule 1-A line 30. A part-year resident deducts only the interest paid while an Indiana resident. Where the car is registered or garaged does not matter; residency does.

The senior deduction. The federal law gives each filer 65 or older an extra $6,000 deduction, below the line. SEA 243 wrote no matching Indiana deduction, and the Department has issued no guidance naming one. For Indiana, that income is fully taxed. Indiana’s own age breaks are unchanged: a $1,000 exemption at 65, another $500 if federal AGI is under $40,000, and the Unified Tax Credit for the Elderly under $10,000. The retirees article covers them.

The three deductions expire after 2026. Nothing in the 2026 law carries them forward; the 2027 session decides.

The smaller changes from the 2026 session

One year, not 180 days, to report a federal change. When the IRS adjusts a federal return, or a taxpayer amends one, Indiana requires an amended IT-40 reporting the change. SEA 243 lengthens the window from 180 days to one year, for federal changes after December 31, 2025.

Casino and lottery withholding. The threshold for Indiana withholding on gambling winnings rises from $1,200 to $2,000 for 2026, indexed from 2027. The winnings are still fully taxable, and Indiana allows no deduction for losses.

Adoption credit for residents only. Indiana’s adoption credit, 20% of the federal credit up to $2,500 per child, is now limited to Indiana residents and prorated by days of residence for a part-year resident, retroactive to 2022.

ABLE credit. Rollovers from one ABLE account to another no longer count as contributions for the 20% credit.

Notices by INTIME only, if you choose. Taxpayers may elect to receive all Department correspondence through INTIME, the Department’s online account, instead of by mail (verify). A notice that is not read is still a notice.

Estimated tax penalty. From July 1, 2026, the underpayment penalty is figured at the statutory interest rate rather than the flat 10% of each period’s shortfall. The safe harbors did not change.

Tax amnesty, now closed. The Department ran an amnesty from July 15 to September 9, 2026 for liabilities from periods ending before January 1, 2024 (verify). Old unpaid Indiana tax is back under the ordinary penalty rules.

Local income tax overhaul pushed to 2029. A 2025 restructuring would have let cities and towns adopt their own income tax rates of up to 1.2% from 2028. House Enrolled Act 1210 moves it to 2029. For 2026 and 2027 the local tax remains a single county rate.

County rates. Only Boone County changed its rate on October 1, 2026, to 1.71%. The rate chart effective January 1, 2027 is to come and matters for 2027 withholding, not for the 2026 return, which uses the county rate in effect on January 1, 2026.

Property tax: the 2025 law arrives on the bills

None of this is on the IT-40, but it is the Indiana tax change most homeowners felt in 2026. Senate Enrolled Act 1 of 2025 restructured homestead relief beginning with bills payable in 2026: a credit of 10% of the homestead bill, up to $300, applied automatically; a credit of up to $150 for homeowners 65 and older with federal AGI of $60,000 or less ($70,000 joint), by application to the county auditor by January 15; a $125 credit for blind or disabled homeowners; and a shift from a fixed homestead deduction, stepping down from $40,000 for 2026 assessments to zero by 2030, to a percentage deduction rising from 40% to two-thirds by 2031. The retirees article has the senior pieces. On the income tax side, the $2,500 homeowner’s and $3,000 renter’s deductions on Schedule 2 are unchanged.

The 2026 return next to the 2025 return

No ballot measure

The November 3, 2026 Indiana ballot carried two constitutional amendments, on bail and on judges’ residency, and no tax question. The next change comes from the 2027 session: whether the tips, overtime and car loan deductions continue, and whether anything is done about the senior deduction.