Indiana Tax Guide 2026

Flat 2.95% income tax — phased reduction continuing

Indiana's flat personal income tax (Ind. Code §6-3-2-1) is following a multi-year reduction under HEA 1002 of 2022 as accelerated by HEA 1427 of 2023: • 2023: 3.15% • 2024: 3.05% • 2025: 3.0% • 2026: 2.95% • 2027: 2.9% (scheduled) Reductions are conditional on state revenue triggers; the 2026 step to 2.95% is in effect. Verify the current year's rate against Indiana DOR before filing. No standard deduction. Indiana uses a $1,000 personal exemption + $1,000 per dependent + add-on exemptions for disabled, elderly, blind. Federal AGI is the starting point; Indiana modifies with state-specific add-backs and subtractions. Indiana DOES NOT conform to QBI §199A (must add back the federal deduction). Most other federal adjustments (depreciation, NOL) require manual reconciliation.

Local Income Tax (LIT) — county overlay

All 92 Indiana counties levy a Local Income Tax (LIT, Ind. Code §6-3.6) on residents — ranging from 0.5% (Vermillion, Warren) to 3.38% (Pulaski). Common urban rates: • Marion County (Indianapolis): 2.02% • Hamilton (Carmel, Fishers): 1.10% • Allen (Fort Wayne): 1.59% • Lake (Gary, Hammond): 1.50% • St. Joseph (South Bend): 1.75% • Vanderburgh (Evansville): 1.20% Residency status for LIT is determined as of January 1 of the tax year — moving in February doesn't change your LIT county for that year. Non-residents who WORK in Indiana counties without working-from-home arrangements may face the non-resident component of the county LIT. LIT is withheld by Indiana employers based on the employee's county of residence indicated on Form WH-4.

Sales tax — flat statewide, no local add-ons

Indiana is one of a small number of states with a uniform statewide sales tax and NO local sales tax (Ind. Code §6-2.5). State rate: 7.0%. Same rate applies in Indianapolis, Fort Wayne, Evansville, South Bend — everywhere. Exemptions: groceries (unprepared food), prescription drugs, most services. Prepared food and restaurant meals taxed at 7%. No clothing exemption. Food and Beverage Tax (separate from sales tax): some counties levy an additional 1% on prepared food and drink (Marion, Hamilton, Allen, others). Innkeeper's Tax: 5%–10% on lodging. Economic nexus (post-Wayfair, Ind. Code §6-2.5-2-1(c)): $100,000 OR 200 transactions. Marketplace facilitator law (Ind. Code §6-2.5-2-1(d)): platforms collect on third-party sales since July 2019.

PTET (Pass-Through Entity Tax)

Indiana PTET (Ind. Code §6-3-2.1, enacted SB 2 of 2023, retroactive to 2022): S-corps and partnerships elect to pay the state-level 3.0% PLUS the maximum county LIT rate (3.38%) at the entity level. Owners receive REFUNDABLE credit for their distributive share. Note: Indiana PTET stacks BOTH state and the highest LIT rate — making the PTET payment 6.38% (3% + 3.38%) maximum. The owner's actual LIT credit is capped at the rate of THEIR county of residence, not the highest rate paid. This creates a small inefficiency for owners residing in low-LIT counties. Election: due 30 days after the original return due date (April 15 for calendar-year, so May 15 for the election). Annual and irrevocable for the year. Federal SALT benefit: 37% × full state/local payment = ~$2.36 federal savings per $10 of PTET paid for top-bracket owners.

Property tax — constitutional caps

Ind. Const. Art. 10 §1 (added by 2010 referendum) caps property tax bills: • 1% of gross assessed value for homesteads (owner-occupied primary residence) • 2% for other residential property (rentals) and agricultural land • 3% for commercial and industrial property These 'circuit-breaker' caps mean local taxing units must absorb shortfalls when otherwise-calculated bills exceed the caps. Indianapolis Marion County homeowners commonly hit the 1% cap on assessed value. Homestead deduction: $48,000 (or 60% of assessed value if lower) deducted before applying the 1% cap. Supplemental homestead deduction: 35% of remaining assessed value up to $600k; 25% above. Senior homestead (65+, income <$30,900) freezes assessed value.

Self-employed considerations

LLC formation: $98 online ($100 paper) via Indiana Secretary of State. Biennial Business Entity Report: $32 (every 2 years). No state-mandated paid family leave. Unemployment: 0.5%–7.4% on first $9,500 wage base. Indiana is among the most administratively simple states for small business: flat 3% rate, no local sales tax, modest filing fees, no annual LLC report (biennial instead). Combined with a 0.5%–2% county LIT, total state+local income tax burden is 3.5%–5% — competitive with peer Midwest flat-rate states. Indiana does NOT have a state-level S-corp election form — federal Form 2553 controls. Both LLC and S-corp owners file Schedule K-1 amounts on IT-40 and pay county LIT on residence-county distributive share.

Worked example: Sarah Whitman, Carmel-based marketing consultant (single, S-corp, 2026)

Sarah's S-corp generates $200,000 net income. She pays herself $130,000 W-2 + $70,000 distribution. Hamilton County resident (1.10% LIT).

Federal: SE tax saved on $70k distribution vs disregarded LLC; QBI §199A on distribution. Indiana personal income tax: Combined W-2 + distribution: $200,000 (full flow-through for IN purposes — IN doesn't reduce by §199A federal QBI; add it back) Less $1,000 personal exemption: $199,000 Indiana state tax: 3.0% × $199,000 = $5,970 Hamilton County LIT: 1.10% × $199,000 = $2,189 Total IN personal: $8,159 If the S-corp elects PTET: Entity pays 3.0% state + Hamilton 1.10% = 4.10% × $200,000 = $8,200 at entity level (federally deductible) Owner credit: $8,200 — washes the personal IN tax liability Federal benefit (37% bracket): 37% × $8,200 = $3,034 federal savings Net result: Same IN dollars but $3,034 more federal income in Sarah's pocket LLC formation/maintenance: $98 + $32 biennial = ~$25/year amortized. No Indiana franchise tax. No annual LLC fee.

Statute references

• State personal income tax (flat) — Ind. Code §6-3-2-1
• Local Income Tax (county) — Ind. Code Title 6, Article 3.6
• Pass-Through Entity Tax (PTET) — Ind. Code §6-3-2.1, enacted by SB 2 (2023)
• Sales tax — state uniform — Ind. Code §6-2.5
• Sales tax economic nexus — Ind. Code §6-2.5-2-1(c), (d)
• Property tax constitutional caps — Ind. Const. Art. 10 §1 (2010 amendment)
• Phased income tax reduction — HEA 1002 of 2022

Related pages

• PTET Analyzer →
• State Tax Comparison →
• LLC vs S-Corp Election →