Indiana collects state income tax from most wage earners, but the rate is flat and lower than many states

Indiana has a state income tax that applies to wages, self-employment income, interest, dividends, and other earnings. The tax rate is 3.15% as of 2024, and it is the same for all taxpayers — there are no tax brackets that increase with income. This flat rate applies whether you earn $30,000 or $300,000 per year.

The state also taxes certain types of retirement income, capital gains, and business profits differently than federal tax does. Understanding which income types Indiana taxes, and at what rate, matters because it changes how much you owe the state separately from what you owe the federal government.

Key Takeaways

  • Indiana's state income tax rate is a flat 3.15% on most types of income, with no progressive brackets.
  • Wages, self-employment income, interest, and dividends are all subject to Indiana state tax.
  • Certain retirement income, including distributions from IRAs and 401(k)s, may be partially or fully exempt from Indiana tax depending on your age and income level.
  • You report Indiana income tax on Form IT-40 (or IT-40PNR for part-year residents) when you file your state return, separate from your federal return.
  • Indiana allows a standard deduction that reduces your taxable income before the 3.15% rate is applied.

How Indiana's flat tax rate compares to federal income tax

Federal income tax uses tax brackets — your rate increases as your income rises, from 10% at the lowest bracket to 37% at the highest. Indiana does not work that way. Everyone in Indiana pays 3.15% on their taxable income, regardless of how much they earn. This means a person making $50,000 pays the same rate as a person making $500,000.

Because Indiana's rate is flat and relatively low, your state tax bill is often smaller than your federal bill. For example, if you earn $60,000 in Indiana wages and claim the standard deduction, your Indiana taxable income might be around $30,000, resulting in a state tax of roughly $945. Your federal tax on the same income would be significantly higher because of the progressive bracket system.

The flat rate also means Indiana does not adjust the tax based on filing status (single, married, head of household) the way federal tax does. Your rate stays 3.15% whether you file single or jointly.

Which types of income Indiana taxes

Indiana taxes wages and salaries — the income you receive from an employer on a W-2 form. It also taxes self-employment income from a business or freelance work, interest income from savings accounts or bonds, and dividend income from stocks or mutual funds. These are all subject to the 3.15% rate.

Capital gains — the profit you make when you sell an asset like a stock or rental property for more than you paid — are taxed as ordinary income in Indiana. This is different from federal tax, where long-term capital gains often receive preferential rates. If you sell a stock for a $10,000 gain in Indiana, that $10,000 is taxed at 3.15%, not at a lower rate.

Certain types of income are exempt or partially exempt. Social Security benefits are not taxed by Indiana. Pension and retirement account distributions receive special treatment: if you are age 59½ or older, distributions from IRAs, 401(k)s, and similar plans may be fully exempt from Indiana tax, depending on your total income. Younger retirees may have limited exemptions. Military retirement pay and some government pensions also receive exemptions.

The standard deduction and how it reduces your Indiana tax bill

Before Indiana applies the 3.15% rate, you subtract a standard deduction from your income. The standard deduction amount depends on your filing status and age. For 2024, the standard deduction ranges from around $3,500 for a single filer to $7,000 for a married couple filing jointly, though these amounts vary slightly by year and are adjusted annually for inflation.

The standard deduction works the same way as the federal standard deduction: it is the amount of income you do not have to pay tax on. If you earn $50,000 and your standard deduction is $3,500, your Indiana taxable income is $46,500, and you owe 3.15% of that amount, or roughly $1,465.

Indiana also allows you to claim the federal standard deduction as a starting point, but the state has its own rules about what counts as deductible. If you itemize deductions on your federal return instead of taking the standard deduction, you cannot itemize on your Indiana return — you must use Indiana's standard deduction.

How to report Indiana income tax when you file

You report Indiana income tax on a separate state return, not on your federal Form 1040. The main form is Form IT-40 (Indiana Individual Income Tax Return). If you lived in Indiana for only part of the year, you file Form IT-40PNR (part-year resident return).

On your Indiana return, you report your total income from all sources, claim your standard deduction, and calculate your tax at 3.15%. You also report any tax withheld by your employer — if your employer took Indiana tax out of your paychecks, that amount is credited against what you owe. If more was withheld than you owe, you receive a refund. If less was withheld, you owe the difference.

Indiana returns are due on the same date as federal returns: April 15 of the following year. You file your Indiana return separately, even though you file your federal return on the same day. Many tax software packages handle both returns in one session, but they are two distinct documents.

Who does not have to pay Indiana income tax

You do not owe Indiana income tax if you had no income during the year. You also do not owe tax on income that is specifically exempt under Indiana law, such as Social Security benefits or, in some cases, retirement distributions if you meet the age and income requirements.

If you lived outside Indiana for the entire year, you do not owe Indiana income tax, even if you earned income from an Indiana source. However, if you worked in Indiana but lived in another state, you may owe tax to both states. Indiana allows a credit for taxes paid to other states to prevent double taxation, but you still have to file and claim that credit.

Nonresidents who earned income only from Indiana sources (such as wages from an Indiana employer) may have different filing requirements. Some nonresidents can file a simplified return or may not need to file at all if their Indiana tax was fully withheld by their employer.

How Indiana income tax withholding works

When you start a job in Indiana, your employer uses a withholding form to determine how much Indiana tax to take from each paycheck. The form is similar to the federal W-4 but is specific to Indiana. Your employer sends the withheld amount to the Indiana Department of Revenue on your behalf.

If you do not want tax withheld, or if you want to adjust the amount, you can file a new withholding form with your employer. However, if you do not have enough tax withheld during the year, you may owe a balance when you file your return in April, plus potential penalties and interest.

Self-employed people in Indiana do not have an employer to withhold tax, so they must pay estimated tax quarterly to the state. Estimated payments are due on the same schedule as federal estimated payments: April 15, June 15, September 15, and January 15 of the following year.

Frequently Asked Questions

Does Indiana tax retirement income differently than wages?

Yes. If you are age 59½ or older, distributions from IRAs, 401(k)s, and similar retirement accounts may be fully exempt from Indiana tax. Younger retirees have more limited exemptions. Social Security is never taxed by Indiana. Military and some government pensions also receive exemptions, but the rules vary by pension type.

What if I work in Indiana but live in another state?

You owe Indiana income tax on the wages you earn in Indiana, even though you live elsewhere. You also owe tax to your home state on the same income. Indiana allows a credit for taxes paid to other states, so you claim that credit on your Indiana return to reduce double taxation.

Is the 3.15% rate the same every year?

The rate has been 3.15% since 2022. Indiana's legislature can change the rate, but it has remained flat at this level for the past few years. Check the Indiana Department of Revenue website for any updates before you file.

Do I have to file an Indiana return if my employer withheld all my tax?

Not necessarily. If your Indiana tax was fully withheld and you have no other Indiana income or tax credits to claim, you may not need to file. However, if you are due a refund or if you have income from multiple sources, filing allows you to claim any refund owed to you.

How do I know if I am considered an Indiana resident for tax purposes?

You are an Indiana resident if you lived in the state for the entire tax year. If you moved to or from Indiana during the year, you are a part-year resident and file Form IT-40PNR instead of Form IT-40. The form asks for the dates you lived in Indiana to calculate your tax accordingly.