Blog by Doug Johnson – Staff Accountant, Storen Financial
Did you, a friend, or family member just move to Indiana and have questions about your taxes? Here are a few of the most frequently asked questions related to the differences between Indiana and other state’s tax returns.
How are Indiana State and Local taxes calculated?
For new residents of Indiana, there is a learning curve on understanding State & Local taxes. Indiana has a flat rate for the State of 3.23%. So if you have $10,000 or $1,000,000 of taxable income, you are taxed at the same rate.
In addition to this, each individual pays a county tax and each County can set their own tax rate. County rates range from .35% for Jefferson to 3.38% for Pulaski. There are a few exceptions to the rule, but an Indiana taxpayer is subject to County taxes based on where lived on January 1st of the tax year.
What date of residence is used to compute county tax rates?
January 1st is the point in time that dictates what County taxes one would be subject to for the year. If someone moved to the State on January 2nd, they would not be subject to County taxes that first year but would be for the following tax year.
Are there different Tax Returns for County and State in Indiana?
Unlike some States that have a different Return for the State and Local/City tax, Indiana County tax computations are included in the State Return.
What do you do if you work in a different county than you live?
You should always have the employer withhold based on your county of residence on January 1st.
How much retirement income is taxed in Indiana?
Like a lot of other States, Indiana does not tax Social Security Benefits. Also, Indiana gives a full or partial deduction for pensions that originate from Railroad Retirement Board, Office of Personnel Management and Defense Finance and Accounting Service (Military Retirement). If one is not lucky enough to be receiving retirement from one of the listed entities, then your retirement income will be fully taxable to State and County. To keep from owing to Indiana on your Tax Return, please ask the Administrator if they will withhold State taxes on the benefits. If they do, then as a rule of thumb, we tell clients that 5% withholding will cover most taxpayers in the state. This covers both State and County rates. If someone knows that they live in a county with a rate greater than 1.7%, then take the percentage up to have withheld 6% or 7%. If the Administrator will not withhold State taxes, then Quarterly Estimates may need to be sent in. Like the Federal, Indiana can charge an Underpayment Penalty if more than $1,000 is owed at the end of the year.
Have additional questions? Feel free to contact us to discuss how these differences will affect your yearly tax return.