Indiana's income tax story in 2026 is one of steady, legislated simplicity: a single flat rate of 3.05% that applies to every Indiana resident equally, regardless of income level. That rate has been declining on a published schedule — from 3.15% in 2023, to 3.10% in 2024, to 3.05% in 2025–2026 — and is set to reach 2.9% by 2027. It is one of the most competitive flat income tax rates in the Midwest.
But Indiana's headline rate tells only half the story. All 92 Indiana counties levy their own separate income tax, ranging from 0.5% in the least-taxed rural counties to 2.9% in the highest. For residents of Indianapolis (Marion County), the combined state-plus-county rate hits 5.02% in 2026. Understanding both layers is essential for any Indiana resident — or anyone considering moving to Indiana.
On the positive side, Indiana fully exempts Social Security benefits from state income tax, offers a meaningful pension deduction for retirees aged 62 and older, and maintains property taxes that average a modest 0.85% effective rate. This guide covers all of it: how Indiana's flat tax works, the complete county income tax picture, retirement income treatment, and detailed dollar-by-dollar worked examples at four income levels.
Indiana's flat income tax is straightforward by design. All Indiana residents pay the same percentage on their Indiana-adjusted gross income — there are no brackets, no phase-outs, and no income-based surcharges. The base is federal adjusted gross income (AGI), modified by Indiana-specific additions and subtractions, primarily the personal exemption system.
For a single filer with no dependents, the calculation is: Federal AGI minus $1,000 personal exemption equals Indiana taxable income. Multiply that by 3.05% to get the state income tax. Add your county rate applied to the same base, and you have your total Indiana income tax obligation.
Indiana's income tax rate reduction is not aspirational — it is written into statute with specific scheduled milestones:
| Tax Year | Indiana State Income Tax Rate |
|---|---|
| 2023 | 3.15% |
| 2024 | 3.10% |
| 2025 | 3.05% |
| 2026 | 3.00% (scheduled) |
| 2027 | 2.9% (target) |
Each 0.05–0.1 percentage point reduction translates to real money. For a resident earning $100,000, the difference between the 2023 rate (3.15%) and the 2027 target (2.9%) is approximately $250/year in state tax savings — before county taxes are factored in.
Indiana taxes wages, salaries, business income, interest, dividends, rental income, and capital gains at the flat rate. There is no preferential rate for long-term capital gains — all are taxed as ordinary income. Indiana does not conform to federal qualified dividend treatment for state purposes in this regard.
Indiana is one of only a handful of states with a comprehensive county-level income tax system where every county — not just some — levies an income tax. This is not a city tax or a local occupational tax; it is a county-level tax administered through Indiana's state tax system and collected on the annual IT-40 state return. County income taxes in Indiana are based on your county of residence as of January 1 of the tax year, not where you work.
| County | Major City | County Rate | Combined with State (3.05%) |
|---|---|---|---|
| Marion County | Indianapolis | 2.02% | 5.07% |
| Allen County | Fort Wayne | 1.48% | 4.53% |
| Vigo County | Terre Haute | 2.55% | 5.60% |
| Lake County | Gary / Hammond | 1.5% | 4.55% |
| St. Joseph County | South Bend | 1.75% | 4.80% |
| Hamilton County | Carmel / Fishers | 1.1% | 4.15% |
| Hendricks County | Avon / Plainfield | 1.5% | 4.55% |
| Boone County | Lebanon / Zionsville | 1.5% | 4.55% |
| Johnson County | Greenwood | 1.2% | 4.25% |
| Madison County | Anderson | 1.75% | 4.80% |
| Delaware County | Muncie | 1.5% | 4.55% |
| Monroe County | Bloomington | 1.345% | 4.395% |
County rates are set annually by county councils. Verify the current rate for your specific county at in.gov/dor before filing.
In the Indianapolis metropolitan area, county tax rates create a meaningful financial difference between living in the city (Marion County, 2.02%) versus suburban counties. Hamilton County (Carmel and Fishers, 1.1%) residents pay nearly 1 percentage point less in county income tax — worth approximately $990/year on a $100,000 income. Over a 10-year period, that is nearly $10,000 in cumulative local income tax savings, which is one factor (along with school quality and housing preferences) that has driven high-income households toward Hamilton County.
Indiana employers are required to withhold county income tax at the rate for the employee's county of residence. If an employee lives in Hamilton County but works in Marion County, the employer must withhold at the Hamilton County rate (1.1%), not the Marion County rate (2.02%). Errors in county code assignment are common, particularly at larger employers with multi-state payroll systems. Indiana residents should confirm their county code on their W-2 (Box 19/20) matches their actual county of residence.
This is the most-searched scenario for Indiana income tax. Here is the complete calculation:
| Gross Income | Indiana Taxable Income* | State Tax (3.05%) | County Tax (2.02%) | Total Indiana Tax | Combined Eff. Rate |
|---|---|---|---|---|---|
| $50,000 | $49,000 | $1,495 | $990 | $2,484 | 4.97% |
| $100,000 ★ | $99,000 | $3,020 | $1,998 | $5,018 | 5.02% |
| $150,000 | $149,000 | $4,545 | $3,010 | $7,554 | 5.04% |
| $250,000 | $249,000 | $7,595 | $5,030 | $12,624 | 5.05% |
★ Highlight example. *Indiana taxable income = federal AGI minus $1,000 personal exemption (single filer). All amounts rounded to nearest dollar. County rates are for Marion County (Indianapolis). Estimates assume no other Indiana deductions.
For the same $100,000 income, a resident of Hamilton County (Carmel or Fishers) pays: State tax $3,020 + County tax at 1.1% ($1,089) = $4,109 total — approximately $909/year less than an Indianapolis (Marion County) resident.
Indiana does not tax Social Security benefits — period. Unlike states such as Kentucky (which taxes Social Security fully) or Minnesota (which uses income-based phase-outs), Indiana exempts all Social Security income regardless of the recipient's total income level. For a retired couple receiving $36,000 in combined Social Security benefits, Indiana's exemption saves them approximately $1,830/year in state income tax (at 3.05% state + 2.02% Marion County = 5.07% combined rate), or about $1,099/year at the state rate alone.
Indiana allows a deduction of up to $16,000 per taxpayer per year for pension and retirement income received by Indiana residents who are 62 years of age or older. This includes:
For a retired couple, both aged 65, each taking $25,000 in IRA distributions, each applies their $16,000 exemption, reducing their combined Indiana taxable retirement income by $32,000. The combined Indiana tax savings on this exemption alone: approximately $1,625 at the state-only rate (3.05% × $32,000 = $976) plus county tax savings.
Indiana fully exempts disability retirement income — defined as amounts received from an employer's disability retirement plan prior to the taxpayer reaching the minimum retirement age specified in the plan. This is fully exempt from Indiana income tax in any amount.
Indiana Public Retirement System (INPRS) pensions and most federal government pensions (CSRS, FERS) do not receive a blanket exemption beyond the $16,000 age-based deduction. Military retirement pay, however, is fully exempt from Indiana income tax — an important distinction for veterans retiring to Indiana.
Combining Social Security exemption, the $16,000 pension deduction for those 62+, military retirement exemption, low property taxes (~0.85%), and a declining flat income tax rate, Indiana is genuinely competitive for retirees within the Midwest — particularly compared to Wisconsin (taxes most retirement income), Minnesota (taxes Social Security for higher-income retirees, top rate 9.85%), and Illinois (which exempts more income but has a 4.95% rate and very high property taxes).
Indiana's flat 3.05% state income tax rate puts it at or near the most competitive end of Midwest states for headline income tax. Here is how Indiana compares to its five bordering states:
| State | Income Tax Structure | Rate at $100K | Social Security | Avg Property Tax |
|---|---|---|---|---|
| Indiana | 3.05% flat | ~3.05% + county | Exempt | ~0.85% |
| Ohio | Graduated 2.75%–3.5% | ~2.75%–3.5% | Exempt | ~1.53% |
| Illinois | 4.95% flat | 4.95% | Exempt | ~2.08% |
| Michigan | 4.25% flat | 4.25% | Exempt | ~1.43% |
| Kentucky | 3.5% flat + local | 3.5% + 2.2% (Louisville) | Taxed | ~0.86% |
| Wisconsin | Graduated 3.54%–7.65% | ~5.3% | Partial exempt | ~1.61% |
Ohio's graduated structure means lower-income Ohioans (under ~$46,100) pay only 2.75% — lower than Indiana's 3.05%. But Ohio's income is not flat: it rises to 3.5% at incomes above about $92,150. For a $100,000 earner, Ohio is slightly cheaper on state income tax alone, but Ohio's much higher property taxes (~1.53% vs Indiana's ~0.85%) often mean Indiana wins on total tax burden for homeowners. Additionally, Ohio's major cities (Columbus, Cleveland, Cincinnati) add local income taxes of 2–2.5%, similar to Indiana's county tax situation.
Illinois has a flat 4.95% income tax rate — the same rate for every earner, the same as Indiana's system but 1.9 percentage points higher. On a $100,000 income, an Illinois resident pays approximately $4,950 in state income tax vs Indiana's $3,020 — a difference of $1,930/year. Illinois also has dramatically higher property taxes averaging 2.08% vs Indiana's 0.85%, making Indiana's total tax burden substantially lower for most households. Illinois does exempt Social Security and most retirement income, but Indiana's lower rates often offset this advantage for working-age residents.
Michigan's flat 4.25% rate is higher than Indiana's 3.05%, and Michigan's average property tax of 1.43% exceeds Indiana's 0.85%. Michigan also has city income taxes in Detroit (2.4% for residents), Grand Rapids, Lansing, and other cities, creating a similar multi-layer situation to Indiana's county taxes. Indiana is generally more competitive than Michigan on total tax burden for most income levels.
Indiana's average effective property tax rate of approximately 0.85% of market value is meaningfully below the national average of ~1.1%. Indiana's circuit breaker system caps property tax at 1% of gross assessed value for owner-occupied homes, preventing the runaway property tax bills seen in Illinois, New Jersey, and Connecticut.
Indiana's homestead exemption reduces the assessed value of an owner-occupied primary residence by up to 60% of the gross assessed value (the Standard Deduction), with supplemental deductions available. This is a significant reduction — in practice it roughly halves the effective tax rate on owner-occupied homes compared to the nominal millage rate.
Indiana has a 7% statewide sales tax with no local additions — what you pay in Indianapolis is what you pay in Evansville. This is unusual among states; most allow local sales tax additions. Indiana's 7% is moderate by national standards. Prescription drugs and most groceries (unprepared food) are exempt from Indiana sales tax. This simplicity is a genuine benefit for businesses and consumers alike.
A common misconception: there is no separate Indianapolis city income tax. The only local income tax layer for Indianapolis residents is the Marion County income tax of 2.02%. Indiana's local tax structure uses counties as the unit — not cities. This differs from states like Ohio (where Columbus, Cleveland, Cincinnati all have separate city income taxes) and Pennsylvania (where local earned income taxes are set at the municipality level).
| Tax Type | Indiana Rate | National Context |
|---|---|---|
| State income tax | 3.05% flat | Below average for states with income tax |
| County income tax | 0.5%–2.9% (varies) | Indiana-specific system; adds significant burden |
| Sales tax | 7% flat statewide | Moderate; no local additions |
| Property tax | ~0.85% avg effective | Below national average (~1.1%) |
| Estate/inheritance tax | None | Indiana repealed both |
Indiana residents file Form IT-40 to report both their state income tax and their county income tax. The county tax is calculated on Schedule CT-40, which is part of the IT-40 package. You need your county's Local Tax Rate to complete this — Indiana publishes updated county rates annually at in.gov/dor.
Your county income tax is based on your Indiana county of residence as of January 1 of the tax year. If you moved to Indiana from another state during the year, you use the county where you lived on January 1 (which might have been outside Indiana, in which case you may not owe county tax for that year — but you should confirm with the Indiana DOR). If you moved between Indiana counties during the year, you owe based on where you lived on January 1 — not a prorated amount based on months in each county.
Indiana employers withhold state and county income tax and report them on the W-2. Box 15 shows the Indiana state abbreviation; boxes 18-19 show local withholding. If your employer is withholding county tax at the wrong rate (a common error, especially for remote workers at large out-of-state employers), you will either owe additional county tax at filing or receive a refund. Always verify your W-2 county withholding amount against your home county's actual rate.
Indiana self-employed individuals must pay both state and county estimated taxes quarterly if they expect to owe $1,000 or more. Indiana estimated tax payments are due April 15, June 15, September 15, and January 15. Both state and county estimated tax can be paid together through Indiana's INtax online portal.
All Indiana income tax rates, forms, schedules, and county rate tables are published by the Indiana Department of Revenue at in.gov/dor. Always verify county rates for the current tax year before filing, as individual county rates are updated annually by county councils.
CountryTaxCalc.com is reader-supported. When you use our partner links, we may earn a commission at no cost to you. Learn more about our affiliate partnerships
★ 4.8 verified reviews · 3,758 reviews
An Indiana CPA can help you navigate county income tax withholding, maximize retirement income deductions, and plan for Indiana's ongoing rate phase-down. TaxHub connects you with licensed CPAs who know Indiana's 92-county tax system.
⚠ Not for simple single-state returns. Free filing is fine for straightforward W-2 situations.
Talk to an Indiana CPA About Your Taxes →Interested in reaching this audience? Advertise on CountryTaxCalc →