Comparing Illinois vs. Indiana taxes comes down to who you are. For most working-age homeowners, Indiana is cheaper overall because its effective property tax rate runs about half of Illinois’s and its base income tax rate is nearly two percentage points lower. For retirees drawing pensions or 401(k) money, Illinois wins by a wide margin because it exempts retirement income entirely. Sales tax, estate tax, and vehicle costs each tilt the balance a bit further depending on where you live and what you spend.
Income Tax
Illinois charges a flat 4.95% on net income with no local income tax anywhere in the state.1Illinois Department of Revenue. Income Tax Rates Whatever county or city you live in, the rate is the same.
Indiana’s state rate dropped to 2.95% for 2026 as part of a series of scheduled reductions.2Indiana Department of Revenue. How to Compute Withholding for State and County Income Tax That looks like a clean win until you add the county layer. Every one of Indiana’s 92 counties imposes a local income tax, ranging from 0.50% to 3.00%.3Indiana Department of Revenue. Rates, Fees and Penalties A resident in a county charging 2.00% pays a combined 4.95%, matching Illinois exactly. In the highest-tax counties, the combined rate hits 5.95%, above Illinois.
So the income tax answer depends on the ZIP code, not just the state line. Pick a low-tax Indiana county and your bill is meaningfully smaller than in Illinois. Pick a high-tax one and you can end up paying more.
Retirement Income
This category flips the comparison. Illinois does not tax any federally qualified retirement income, including Social Security, public and private pensions, 401(k) and IRA distributions, and railroad retirement benefits.4Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income? A retiree pulling $60,000 a year from a pension and Social Security owes zero Illinois state income tax on that money.
Indiana exempts Social Security and railroad retirement benefits but taxes most other retirement income at the full state and county rate. There is a deduction of up to $16,000 for federal civil service annuity income if you are at least 62, reduced dollar-for-dollar by any Social Security or railroad retirement benefits received in the same year.5Indiana Department of Revenue. Income Tax Information Bulletin 26 Military retirement pay qualifies for a separate deduction. If your retirement income comes mostly from a private pension, 401(k), or IRA, though, Illinois’s blanket exemption saves you far more than anything Indiana offers.
Property Tax
Property tax is where Indiana pulls decisively ahead. Illinois carries one of the highest effective property tax rates in the country, averaging about 1.83% of a home’s market value.6Tax Foundation. Illinois Tax Rates and Rankings Indiana’s statewide average effective rate is roughly 0.74%. On a $300,000 home, that gap works out to roughly $3,270 more per year in Illinois.
The reason the gap is so persistent is a hard cap in Indiana law. The total property tax bill on an owner-occupied home cannot exceed 1% of gross assessed value. Rental and agricultural property is capped at 2%, and commercial property at 3%.7IN.gov. Citizen’s Guide to Property Tax However high the local rates get, the bill stops there. Illinois has no comparable cap, and effective rates in some Chicago suburbs push well above 3%.
Illinois does offer partial relief through the General Homestead Exemption (up to $10,000 off Equalized Assessed Value in Cook County, $6,000 in most other counties) and additional exemptions for seniors, along with a state income tax credit equal to 5% of property taxes paid on your principal residence.8Illinois Department of Revenue. Pub-108, Illinois Property Tax Credit These help around the edges. They do not close the gap.
Sales Tax
Indiana charges a flat 7.00% sales tax statewide with no local add-ons. Illinois starts lower, at 6.25% state, but allows cities, counties, and transit districts to layer on their own. The average combined rate across Illinois is 8.96%, reaching 10.25% in Chicago.9Tax Foundation. State and Local Sales Tax Rates, 2026 If you shop near Chicago, Indiana’s flat 7% is a bargain on most purchases.
Groceries and drugs widen the gap. Indiana fully exempts most unprepared groceries and prescription drugs.10Cornell Law School Legal Information Institute (LII). 45 IAC 2.2-5-40 – Food Not Exempt Illinois taxes groceries, prescription drugs, and over-the-counter medications at a reduced state rate of 1%, and local taxes can add more.11Cornell Law School. Ill. Admin. Code tit. 86, 140.126 – Taxation of Food, Drugs and Medical Appliances Clothing is fully taxable in both states.
Estate Tax
Illinois imposes a state-level estate tax on estates exceeding $4,000,000. Cross that threshold and the tax applies to the full value, not just the amount above it, at rates ranging from roughly 0.8% to 16%. Indiana repealed its inheritance tax retroactively to January 1, 2013, and levies no state estate or inheritance tax at all. For a household with substantial assets, this one line can outweigh decades of income or property tax differences.
Vehicle Registration and Fuel
Illinois charges $151 per year to register a standard passenger vehicle.12Illinois Secretary of State. Fees Indiana’s base fee is $21.35.13Indiana Bureau of Motor Vehicles. BMV Fee Chart Indiana adds a County Vehicle Excise Tax that varies with the vehicle’s age, value, and county and can run several hundred dollars.14Justia. 2025 Indiana Code Title 6 Article 3.5 Chapter 4 – County Vehicle Excise Tax Even so, Indiana’s total registration cost is typically lower for most vehicles.
Electric vehicle owners pay surcharges in both states: $100 annually in Illinois and $242 in Indiana, the latter indexed to inflation every five years.15National Conference of State Legislatures. Special Registration Fees for Electric and Hybrid Vehicles For EV drivers, that partly offsets Indiana’s lower base fee.
Fuel tax also favors Indiana, though modestly. Illinois’s state gas tax is 48.3 cents per gallon through June 2026, and Chicago-area municipalities add local fuel taxes on top.16Illinois Department of Revenue. Motor Fuel Tax Rates and Fees Indiana combines a fixed excise tax with a variable gasoline use tax that adjusts monthly, generally landing a few cents below the Illinois state rate before local add-ons.
Business Taxes
If you run a business or are choosing where to form one, the gap is among the widest in the Midwest. Illinois imposes a combined corporate income tax rate of 9.50%, made up of a 7.00% corporate income tax and a 2.50% personal property replacement tax. Indiana’s corporate rate is a flat 4.90%, roughly half.17Tax Foundation. State Corporate Income Tax Rates and Brackets, 2026 Recurring compliance costs also run lower in Indiana; an Indiana LLC files a business entity report every two years for $30, while an Illinois LLC files annually for $75.
If You Live in One State and Work in the Other
Illinois and Indiana do not have a reciprocal income tax agreement. Illinois has reciprocity with Iowa, Kentucky, Michigan, and Wisconsin; Indiana is not on that list.18Illinois Department of Revenue. Filing Requirements An Illinois resident working in Indiana owes Indiana income tax on wages earned there and must file Indiana returns. A credit on the Illinois return for taxes paid to Indiana prevents double taxation, but you file in both states. The same works in reverse. It does not necessarily raise your total tax, but it does add filing work and, often, preparer fees.
Which State Is Cheaper for You
A working-age homeowner in a low-to-moderate-tax Indiana county pays less in almost every category: income tax, property tax, vehicle costs, and business taxes. The property tax savings alone can top $3,000 a year on a median-priced home.
A retiree living off a private pension, 401(k), or IRA is in the opposite situation. Illinois’s blanket retirement exemption erases what would otherwise be a real tax bill. An Indiana retiree drawing $50,000 from a private pension still owes state and county income tax on the full amount; the same retiree across the border in Illinois owes nothing.
High-spending households in the collar counties around Chicago can also come out ahead in Indiana on sales tax, especially given the grocery exemption. And any household with a taxable estate above $4,000,000 has a strong reason to weigh Illinois’s estate tax against Indiana’s lack of one. The right answer depends less on which state you prefer than on which of these categories moves the most money in your life.