Does Indiana Have a State Income Tax?

Yes, Indiana has a state income tax that applies to individuals residing in the state and those earning income from Indiana sources. Its income tax structure includes both state-level application and additional local income taxes prevalent across its counties.

State Income Tax in Indiana

Indiana imposes a relatively flat state income tax rate on an individual’s adjusted gross income. For the 2024 tax year, which covers taxes filed in 2025, the state income tax rate is 3.05%. The state legislature has enacted plans to gradually reduce this rate, with a target of reaching 2.9% by 2027. This flat-rate system means the same percentage applies to all taxable income, regardless of the amount earned.

Income subject to Indiana’s state income tax generally mirrors federal taxable income. This includes wages, salaries, commissions, business income, investment income (capital gains, dividends, interest), pensions, and annuities. Social Security benefits are exempt from state taxation.

Local Income Taxes in Indiana

In addition to the statewide income tax, many counties in Indiana levy their own local income taxes. All 92 counties in Indiana currently impose a Local Income Tax (LIT). These local taxes were consolidated into the single LIT structure effective for the 2017 tax year.

The rates for these local income taxes are not uniform across the state and can vary significantly from one county to another. These rates typically range from approximately 0.5% to 3.0% of an individual’s income. The specific rate an individual pays depends on where they reside or where their principal place of business or employment is located on January 1st of the tax year. This means that even if someone lives outside Indiana but works within an Indiana county that imposes a local tax, they may be subject to that county’s LIT.

Residency and Tax Obligations

An individual’s tax obligations in Indiana depend primarily on their residency status. A full-year resident of Indiana maintains their legal residence in the state from January 1 through December 31 of the tax year. This applies even if not physically present, provided their legal domicile, such as holding an Indiana driver’s license or maintaining voting rights, remains in the state. Full-year residents must report all income taxable for federal purposes to Indiana, regardless of where the income was earned.

Part-year residents are individuals who either moved into or out of Indiana during the tax year. Their tax liability extends to all income received while they were a resident of Indiana, as well as any income derived from Indiana sources during the period they were a nonresident.

Non-residents are individuals domiciled in another state who earn income from Indiana sources. Only income directly attributable to Indiana sources, such as wages from work performed or income from real property located in Indiana, is subject to Indiana income tax for non-residents.

Indiana also maintains reciprocal agreements with several neighboring states, including Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin. These agreements mean that residents of these reciprocal states who earn only wages, salaries, tips, or commissions in Indiana are taxed by their state of residence, not by Indiana, on that specific income. However, if a resident of a reciprocal state earns other types of Indiana-sourced income beyond these categories, they would still be required to file an Indiana non-resident tax return.