Does Indiana Tax Social Security and Retirement Income?

Indiana does not tax Social Security

Indiana starts with federal adjusted gross income and then removes Social Security. The taxable amount from federal Form 1040 or 1040-SR, line 6b, is deducted on Schedule 2, line 5 of Form IT-40, with no income limit and no age test. Railroad retirement benefits issued by the U.S. Railroad Retirement Board are deducted on line 6. (Indiana Department of Revenue, IT-40 Full-Year Resident Individual Income Tax Booklet (2025))

The deduction carries through to county tax, because counties tax the Indiana figure that is left after it. Social Security does count against one other break: the civil service annuity deduction is reduced dollar for dollar by the Social Security the annuitant receives. (Indiana Department of Revenue, IT-40 Full-Year Resident Individual Income Tax Booklet (2025))

The federal government is a separate matter. Up to 85% of a benefit can be taxed on a federal return once other income passes fixed thresholds, wherever you live. Our taxable Social Security calculator shows how much of yours is counted.

Pensions are taxed in full, except military retirement pay and part of a federal civil service annuity

Indiana has no general pension exclusion. The instructions for the Social Security lines say not to enter any other type of pension or retirement income there, and no other line of Schedule 2 removes a private employer pension. A $30,000 corporate pension is taxed at 2.95%, or $885, plus the county rate. (Indiana Department of Revenue, IT-40 Full-Year Resident Individual Income Tax Booklet (2025))

Military retirement income and survivor’s benefits are fully deductible. For 2022 and later years the deduction equals the entire amount received, and the retirement or survivor benefit statement is enclosed with the return. The deduction is claimed on Schedule 2 with code 632, and on a joint return each spouse who qualifies claims their own. (Indiana Department of Revenue, IT-40 Full-Year Resident Individual Income Tax Booklet (2025))

Federal civil service annuitants who are at least 62 by the end of the year, and surviving spouses of annuitants, can deduct the taxable annuity up to $16,000, less all Social Security and tier 1 and tier 2 railroad retirement income that person received (code 601). An annuitant with a $21,900 annuity and $6,300 of Social Security deducts $9,700; one whose Social Security is $16,000 or more deducts nothing. State and local government pensions, including Indiana public employee and teacher pensions, have no comparable deduction. (Indiana Department of Revenue, IT-40 Full-Year Resident Individual Income Tax Booklet (2025))

IRA and 401(k) withdrawals and Roth conversions are fully taxable

Taxable withdrawals from traditional IRAs, 401(k), 403(b) and 457 plans are part of federal adjusted gross income on Form IT-40, line 1, and Indiana provides no deduction for them at any age. Our examples tax every dollar of pension and IRA income at the state rate. (Indiana Department of Revenue, IT-40 Full-Year Resident Individual Income Tax Booklet (2025))

A Roth conversion is taxed the same way in the year it is made. At the 2026 state rate a $50,000 conversion adds $1,475 of state tax, and county tax adds between $250 in Porter County and $1,500 in Randolph County. Qualified Roth withdrawals are not in federal adjusted gross income, so they are not taxed by the state or the county. (Indiana Department of Revenue, Departmental Notice #1: state and county income tax rates effective October 1, 2026)

To size a conversion against federal brackets and Medicare surcharges, see the Roth conversion calculator; for required withdrawals, the RMD calculator.

Interest, dividends and capital gains are taxed at the same flat rate

Indiana has no separate rate or exclusion for long-term capital gains or qualified dividends. They are in federal adjusted gross income and are taxed at 2.95% for 2026 plus the county rate, the same as interest and ordinary dividends. (Indiana Department of Revenue, IT-40 Full-Year Resident Individual Income Tax Booklet (2025))

Interest on direct obligations of the federal government, such as Treasury bills, notes, bonds and U.S. savings bonds, is deducted from Indiana income. Interest on Indiana state and local bonds is not taxed. Interest on another state’s municipal bonds is taxable in Indiana if the bond was acquired after December 31, 2011; bonds held since before 2012 keep their exemption. (Indiana Department of Revenue, Income Tax Information Bulletin #19: Government Obligations (January 2025))

The state adjusted gross income tax rate for individuals is 2.95% for 2026, down from 3.0% for 2025, and it adjusts to 2.90% in 2027. One rate applies to all taxable income and every filing status. (Indiana Department of Revenue: Rates, Fees & Penalties (individual income tax rate for 2026 and 2027))

All 92 counties levy an income tax on the same taxable income as the state (Form IT-40, line 7), so it falls on pensions, IRA withdrawals and investment income as well as wages. In the rate chart effective October 1, 2026, rates run from 0.5% in Porter County to 3.0% in Randolph County; Hamilton County is 1.1%, Lake County 1.5%, Allen County 1.59% and Marion County 2.02%. On top of the state tax in our examples, the single retiree would owe county tax of $215 in Porter County and $1,290 in Randolph County; the first couple $430 in Porter County and $2,580 in Randolph County; and the couple with the larger portfolio $1,080 in Porter County and $6,480 in Randolph County. (Indiana Department of Revenue, Departmental Notice #1: state and county income tax rates effective October 1, 2026)

Indiana has no standard deduction. Each filer and spouse takes a $1,000 exemption. A person who is 65 or older takes an additional $1,000, and a further $500 if the federal adjusted gross income on Form IT-40, line 1, is under $40,000 ($20,000 if married filing separately). A couple who are both 65 with federal AGI of $40,000 or more therefore subtract $4,000, worth $118 of state tax. All three example households are over the $40,000 line. (Indiana Department of Revenue, IT-40 Full-Year Resident Individual Income Tax Booklet (2025))

Two deductions depend on housing and are not in our examples. A homeowner deducts Indiana property tax paid on a principal residence, up to $2,500 ($1,250 if married filing separately); a renter can instead claim the renter’s deduction for rent paid on a principal residence that was subject to Indiana property tax. A homeowner with a $2,500 property tax bill would owe about $74 less state tax than the example figures. (Indiana Department of Revenue, IT-40 Full-Year Resident Individual Income Tax Booklet (2025))

The age-based breaks on the income tax return are modest: the additional $1,000 exemption at 65, and the further $500 when federal AGI is under $40,000. Together they are worth $44.25 of state tax per person at the 2026 rate. (Indiana Department of Revenue, IT-40 Full-Year Resident Individual Income Tax Booklet (2025))

The Unified Tax Credit for the Elderly is a refundable credit of $40 to $140 for residents 65 or older whose federal AGI is under $10,000. A couple who are both 65 receive $140 below $1,000 of income, $90 from $1,000 to $2,999 and $80 from $3,000 to $9,999. Few households with pension or IRA income qualify. (Indiana Department of Revenue, IT-40 Full-Year Resident Individual Income Tax Booklet (2025))

The same three households appear on every state page, so the figures can be compared across states. Each is a full-year resident taking the standard deduction, with no dependents. The figures are state income tax only: any county, city or school district income tax is described on this page but not added in. Pension income is from a private employer, and IRA figures are taxable withdrawals from traditional accounts. The state tax is our calculation from Indiana's published 2026 rules; it is an illustration, not a return.

These households also owe federal income tax, which is the same wherever they live. The tax bracket calculator and the guide to taxes in retirement cover that side.

As a comparative measure, Tax Foundation figures drawn from Census data put Indiana property taxes at 0.76% of owner-occupied home value in 2024, which ranks 29th highest among the states. (Tax Foundation, Property Taxes by State and County, 2026 (comparative figures from Census ACS data))

Property tax bills are capped at a percentage of gross assessed value: 1% for a homestead, 2% for other residential property and farmland, and 3% for other property. A bill that would exceed the cap is reduced by a credit. (Indiana Department of Local Government Finance: Tax Bill 101 (property tax caps, deductions and credits))

Senate Enrolled Act 1 of 2025 is changing how a homestead’s taxable value is figured. The flat standard deduction was $48,000 for the 2025 assessment date (taxes payable in 2026) and is $40,000 for the 2026 assessment date (taxes payable in 2027), falling by $10,000 a year to nothing from the 2030 assessment date. The supplemental deduction, a percentage of the value left after the standard deduction, rises in exchange: 40% for taxes payable in 2026, 46% in 2027, 52% in 2028, 57% in 2029, 62% in 2030 and 66.7% from 2031. (Indiana Department of Local Government Finance, Indiana Property Tax Benefits, State Form 51781 (R20 / 8-25))

The same law added a Supplemental Homestead Credit for every homestead that receives the standard deduction: the lesser of 10% of the property tax bill on the homestead or $300, starting with taxes payable in 2026. Tax from a levy approved by local referendum is left out of the calculation. The department’s worked example shows a $226,700 home receiving a credit of $211.70. The new credits for owners 65 and older, described next, first applied to the same 2026 bills. (Indiana Department of Local Government Finance, Frequently Asked Questions: 2025 Legislative Overview (June 18, 2025))

The Over 65 Credit is a flat $150 off the property tax bill. The owner must be 65 by December 31 of the year before the credit is claimed and must have owned the home for at least a year, and federal adjusted gross income two years before the bill is payable cannot exceed $60,000 on a single return or $70,000 on a joint return. Only one credit is allowed per property. (Indiana Department of Local Government Finance, Indiana Property Tax Benefits, State Form 51781 (R20 / 8-25))

The credit took the place of the former over-65 deduction from assessed value, which the 2025 law converted. A 2026 law (House Enrolled Act 1210) added a requirement, effective January 1, 2026, that the person claiming the credit live in the home; absence in a nursing home or hospital does not disqualify an owner. A recipient who stays eligible does not need to reapply each year, but must tell the county auditor within 60 days of becoming ineligible. (Indiana Department of Local Government Finance, memo: Legislation Affecting Deductions, Credits, and Exemptions (May 27, 2026))

The Over 65 Circuit Breaker Credit limits the yearly increase in a qualifying homestead’s tax bill to 2%. Its income limits were raised by the 2025 law to $60,000 for a single filer and $70,000 for a joint return for bills payable in 2026, and they are indexed to the Social Security cost-of-living adjustment: $61,680 and $71,960 for bills payable in 2027. (Indiana Department of Local Government Finance, memo: Over 65 Circuit Breaker Income Threshold Calculation for Pay 2027 (April 20, 2026))

Indiana’s sales tax is seven percent, collected by every registered retail merchant in the state. (Indiana Department of Revenue: Sales Tax)

There is no general local sales tax. As a comparative figure, the Tax Foundation puts Indiana’s combined state and average local rate at 7.00% as of January 2026: the second-highest state rate in the country but only the 24th-highest combined rate, because most states add local taxes. (Tax Foundation, State and Local Sales Tax Rates, 2026 (comparative figures))

Grocery food is exempt. Candy, soft drinks, dietary supplements, alcoholic beverages, tobacco and prepared food are taxed. Counties and municipalities with state authority can add a food and beverage tax on restaurant meals, generally 1%, and 2% where both a county and a municipality within it have adopted one; Marion County is among the exceptions to the 1% rate. (Indiana Department of Revenue, Sales Tax Information Bulletin #29: Sales of Food (September 2025))

Drugs sold by a registered pharmacist or licensed practitioner are exempt, as are insulin, oxygen, blood and blood plasma bought for medical purposes. (Indiana Department of Revenue, Sales Tax Information Bulletin #48: Sales Tax Application to Medical Profession (April 2023))

Indiana has no estate tax and no inheritance tax. The inheritance tax applied only to people who died on or before December 31, 2012; the legislature repealed it in 2013. The Department of Revenue has retired the forms and says no inheritance tax return should be filed after October 5, 2023, for residents or nonresidents. (Indiana Department of Revenue: Inheritance Tax Information)

What an heir does owe is income tax. Withdrawals from an inherited traditional IRA or 401(k) are part of the heir’s federal adjusted gross income, and an heir living in Indiana pays the state rate and the county rate on them with no exclusion. (Indiana Department of Revenue, IT-40 Full-Year Resident Individual Income Tax Booklet (2025))

The federal estate tax applies in every state. The estate tax calculator estimates both the federal tax and any state tax.

The state rate is 2.95% for 2026 and adjusts to 2.90% in 2027, the last step of the reductions already scheduled. (Indiana Department of Revenue: Rates, Fees & Penalties (individual income tax rate for 2026 and 2027))

A 2025 law (Senate Enrolled Act 451) allows further cuts of 0.05 percentage points in even-numbered years from 2030, but only if state general fund revenue has grown by at least 3.5% in each of the preceding fiscal years the statute names. Nothing below 2.90% is scheduled unless those tests are met. (Indiana Department of Revenue, Legislative Synopsis 2025)

The 2025 property tax law (Senate Enrolled Act 1) also rewrites local income tax. County rates will be rebuilt from separate components that together cannot exceed 2.9%, and cities and towns will be able to adopt their own local income tax of up to 1.2% on local taxpayers in the municipality, on top of the county tax. (Indiana Department of Revenue, Legislative Synopsis 2025)

A 2026 law (House Enrolled Act 1210) pushed that local income tax overhaul back a year. Existing county expenditure rates now expire after December 31, 2028 unless the county renews them from January 1, 2029, and a municipality can impose its own rate only after December 31, 2028. County rates could therefore look quite different from 2029. (Indiana Department of Revenue, Legislative Synopsis 2026)

On the property tax side, the homestead standard deduction falls from $48,000 to $40,000 for taxes payable in 2027 while the supplemental deduction rises from 40% to 46%. The 2026 session also replaced two property tax deductions for disabled veterans with credits. (Indiana Department of Local Government Finance, memo: Legislation Affecting Deductions, Credits, and Exemptions (May 27, 2026))

A full-year resident is someone who maintains a legal residence in Indiana from January 1 through December 31 and files Form IT-40 on income from all sources. Someone who moves in or out during the year and received income while living in Indiana files Form IT-40PNR, the part-year resident and nonresident return, instead. (Indiana Department of Revenue, IT-40 Full-Year Resident Individual Income Tax Booklet (2025))

County tax follows a different date. Both the county of residence and the county of principal employment are fixed on January 1 of the tax year. A person living in an Indiana county that day pays that county’s rate for the whole year, even after moving to another county; a person living outside Indiana that day owes county tax only if their main place of work was in an Indiana county. (Indiana Department of Revenue, Departmental Notice #1: state and county income tax rates effective October 1, 2026)

Under federal law (4 U.S.C. 114) a state cannot tax the retirement income of a person who is not its resident or domiciliary. An Indiana public pension or a 401(k) built during an Indiana career is taxed only by the state where the retiree lives when it is paid, and a pension earned elsewhere becomes Indiana income once the retiree is an Indiana resident. (4 U.S.C. 114, Limitation on State income taxation of certain pension income)