Indiana Retirement Tax Friendliness

Indiana Retirement Taxes

The state of Indiana stretches from the southern shores of Lake Michigan in the north to the Ohio River, which runs along the state’s southern border. While cities in the north experience harsh Midwestern winters, areas near the Kentucky border enjoy a somewhat more temperate climate.

Just as the state’s weather varies widely from north to south, retirement taxes in Indiana can be both good and bad. Like most states, Indiana does not tax Social Security income. It also has relatively low property taxes. On the other hand, the Hoosier State does tax retirement income from pensions and retirement savings accounts.

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Is Indiana tax-friendly for retirees?

Indiana is moderately tax-friendly for retirees. As described below, Social Security is exempt from the state's 3.15% flat income tax, while other forms of retirement income are not. The state’s median effective property tax rate is 0.82%, which is below the national median (1.01%), while the state sales tax rate is quite high at 7%. Luckily, local jurisdictions don't charge their own sales taxes.

Is Social Security taxable in Indiana?

Social Security is not taxed in Indiana. Therefore, when filing an Indiana income tax return, any Social Security income tax included on your federal return should be subtracted. Taking this tax exemption into account, some retirees may be able to live on Social Security alone in places where the cost of living is especially low.

Are other forms of retirement income taxable in Indiana?

Pension income, 401(k) income, IRA income and income from any other retirement savings accounts are all taxable in the state of Indiana. The state tax rate is 3.15%.

How high are property taxes in Indiana?

The average effective property tax rate in Indiana is 0.82%, which ranks in the bottom half of the U.S. Home values in Indiana are also relatively low. In fact, the median home value is $158,500, far below the national median of $281,900. That means senior homeowners in Indiana can expect their housing costs to be fairly low.

What is the Indiana "Over 65 Deduction?"

Homeowners are given substantial property tax benefits in Indiana. The state's "Over 65 Deduction" is available to seniors who have owned and occupied their principal residence for at least one year, have a combined adjusted gross income (AGI) of no more than $40,000 and have an assessed property value of less than $240,000. The deduction is equal to the lesser of $14,000 or half of the property's assessed value, which is subtracted from assessed value when calculating taxes.

What is the Indiana homestead deduction?

There are a number of other deductions available to all homeowners, including seniors and retirees. The Indiana homestead standard deduction is equal to the lesser of 60% of the initial assessed value or $45,000. The supplemental homestead deduction is equal to 35% of the first $600,000 in assessed value and 25% of assessed value above that amount.

How high are sales taxes in Indiana?

While there are no local sales taxes in Indiana, the state rate of 7% is quite high. However, that tax rate does not apply to food or prescription drugs. Medical equipment, such as oxygen tanks or walkers, is also exempt.

What other Indiana taxes should I be concerned about?

There isn't much else to concern yourself with, as the Hoosier State does not have an inheritance or estate tax.