Indiana vs California: Comparing Taxes and Financial Considerations

Choosing where to live or do business involves weighing financial factors, and taxes play a major role. Indiana and California have vastly different tax structures, affecting personal income, corporate rates, and property costs. These differences influence residents’ financial well-being and business operating costs.

A closer look at key tax categories highlights the financial impact on individuals, families, and companies.

Personal Income Taxes

Indiana and California take different approaches to individual income taxes. Indiana uses a flat tax system, meaning all taxpayers pay the same rate regardless of earnings. As of 2024, the rate is 3.15%, with plans to gradually reduce it to 2.9% by 2027 if revenue targets are met. This structure simplifies tax calculations and generally results in lower burdens for high earners compared to progressive tax states.

California has a progressive income tax system with rates ranging from 1% to 13.3%, the highest top marginal rate in the country. Individuals earning over $1 million pay the highest rate, plus a 1% mental health services tax. Middle-income earners typically fall within the 9.3% bracket.

Deductions and credits also differ. Indiana largely follows federal deductions but offers fewer state-specific credits. California provides credits such as the California Earned Income Tax Credit (CalEITC) for low-income workers and deductions for mortgage interest and property taxes, benefiting lower and middle-income residents.

State Sales Taxes

Sales taxes affect both the cost of living and business expenses. Indiana imposes a 7% statewide sales tax, among the highest flat rates in the country. Local governments cannot add additional sales taxes, ensuring a uniform rate statewide. This simplifies compliance for businesses, though Indiana taxes a broad range of goods and services, including prepared food, utilities, and certain digital products.

California’s base sales tax rate is 7.25%, but local jurisdictions can impose additional district taxes. As a result, total sales tax rates vary widely, with some areas—such as Los Angeles and San Francisco—reaching 10.25% or higher. This variability adds complexity for businesses operating in multiple locations.

Exemptions also differ. Indiana exempts most groceries, prescription medications, and medical devices. California offers similar exemptions but also provides tax breaks for renewable energy equipment and certain manufacturing supplies. Businesses in California can qualify for partial exemptions on manufacturing equipment purchases if they meet eligibility criteria.

Property Taxes

Indiana generally has lower property tax rates, with an average effective rate of 0.81% of a home’s assessed value. The state enforces a property tax cap system, limiting rates to 1% for owner-occupied homes, 2% for rental properties, and 3% for commercial real estate. This cap helps prevent sudden tax increases and provides homeowners with predictable costs.

California operates under Proposition 13, a 1978 law that caps property taxes at 1% of a property’s assessed value, with annual increases limited to 2% unless the property is sold. When a sale occurs, the property is reassessed at market value, often leading to significant tax increases for buyers. Long-term homeowners benefit from lower tax bills relative to market value, while newer homeowners face higher costs.

Investment and rental properties are taxed differently in each state. Indiana’s 2% cap on rental properties helps keep costs manageable for landlords, potentially leading to lower rents. In California, reassessment-driven tax increases are often passed on to renters, contributing to high housing costs. Additionally, California imposes supplemental property taxes when properties change ownership, requiring buyers to pay a prorated tax bill based on the new assessed value within the first year of purchase.

Corporate Tax Considerations

Indiana and California have stark differences in corporate taxation. Indiana levies a flat corporate income tax of 4.9% as of 2024, one of the lowest in the nation. The state has been gradually reducing this rate to attract investment. Indiana also does not impose an alternative minimum tax (AMT), avoiding complex calculations that can increase tax liability in other states.

California applies an 8.84% corporate income tax, significantly higher than Indiana’s rate. Additionally, S corporations face a 1.5% franchise tax on net income, with a minimum annual tax of $800, regardless of profitability. Startups and small businesses must account for this fixed cost, which can be burdensome in low-revenue years. California’s tax code also includes apportionment rules requiring corporations to use a single-sales factor formula to determine taxable income, affecting businesses with operations across multiple states.

Estate and Inheritance Taxes

Indiana does not impose an estate or inheritance tax, having repealed its inheritance tax in 2013. This means heirs are not subject to additional state taxation when receiving assets from an estate. The absence of state-level death taxes makes Indiana attractive for individuals focused on preserving generational wealth.

California also does not levy an estate or inheritance tax, having eliminated its state estate tax in 1982. However, high property values and capital gains taxes can still impact estate planning. Heirs who inherit real estate benefit from California’s step-up in basis rule, which resets the property’s tax basis to its fair market value at the time of inheritance, reducing potential capital gains taxes when selling the asset. Recent changes, such as Proposition 19, have limited property tax reassessment exclusions for inherited properties, increasing tax burdens for some beneficiaries.

Retirement Account Treatment

Indiana and California tax retirement income differently. Indiana exempts Social Security benefits from state income tax but fully taxes distributions from traditional IRAs, 401(k) plans, and pensions at the state’s flat income tax rate. While retirees relying on these income sources will owe state taxes, the rate remains lower than in progressive tax states.

California also exempts Social Security benefits but fully taxes withdrawals from traditional retirement accounts and pensions at its progressive income tax rates. This can result in a higher tax burden for retirees with substantial savings. For example, a retiree withdrawing $100,000 annually from a 401(k) could face a state tax rate as high as 9.3% or more, depending on total income. The high cost of living and taxation on retirement income often lead some retirees to relocate to lower-tax states to preserve more of their savings.