Indiana adjusted gross income tax deductions and credits work in two different places on your return. Deductions come off your Indiana adjusted gross income before the state’s flat 2.95% rate is applied, so each dollar of deduction saves roughly three cents of tax. Credits come off the tax itself after it’s calculated, so a dollar of credit saves a full dollar. Knowing which bucket a tax break falls into tells you how much it’s actually worth to you.
Where Deductions Fit in the Indiana Calculation
Your Indiana return starts with the federal adjusted gross income from your federal return, then applies state-specific adjustments.1Indiana General Assembly. Indiana Code 6-3-1-3.5 – Adjusted Gross Income Some of those adjustments add income back in. Interest on municipal bonds issued by other states is one example. Any federal deduction you took for income taxes paid to another state has to be added back too, because Indiana handles that through a credit instead.
After the add-backs, you subtract the deductions on Schedule 2 of Form IT-40, then subtract personal and dependent exemptions. What’s left is multiplied by 2.95% to produce your state tax. County tax is calculated separately on the same base.
Personal and Dependent Exemptions
Indiana allows a $1,000 exemption for each spouse on the return, which comes to $2,000 for a married couple filing jointly. Each qualifying dependent adds a $1,500 exemption, and in the first year you claim a new dependent, that exemption is $3,000.1Indiana General Assembly. Indiana Code 6-3-1-3.5 – Adjusted Gross Income Exemptions reduce the amount taxed at 2.95%, so they work like deductions rather than credits.
The Main Indiana Deductions
Schedule 2 holds the deductions most individual filers use. The two biggest ones go to people based on how they house themselves.
Renter’s Deduction
If you rent your principal residence in Indiana, you can deduct up to $3,000 of rent paid during the year. The cap is $1,500 if you’re married filing separately.2Indiana General Assembly. Indiana Code 6-3-2-6 – Deduction Rent Payments Hold onto your lease, your rent receipts, and your landlord’s name and address. The Department of Revenue can ask for them.3Indiana Department of Revenue. IT-40 Full Year Resident Individual Income Tax Booklet
Homeowner’s Property Tax Deduction
If you own and live in your home, you can deduct up to $2,500 of Indiana property taxes paid on that principal residence, or $1,250 if married filing separately.3Indiana Department of Revenue. IT-40 Full Year Resident Individual Income Tax Booklet The home has to be your primary residence, not a rental or a property where the tax is already being written off as a business expense. The return asks for the property address, how many months you lived there, and how much Indiana property tax you paid.
Other Schedule 2 Deductions
Schedule 2 also lets you subtract interest on U.S. government obligations, taxable Social Security and railroad retirement benefits that showed up in your federal income, and any state tax refund your federal return included. Military pay has its own line. Starting with the 2024 tax year, the military service deduction covers the full amount of active-duty pay included in federal AGI.3Indiana Department of Revenue. IT-40 Full Year Resident Individual Income Tax Booklet
The Main Indiana Credits
Credits come off your tax dollar for dollar. Some are refundable, meaning Indiana will pay you the excess if the credit is larger than your tax. Others are non-refundable and can only drop your bill to zero.
CollegeChoice 529 Credit
Contributions to a CollegeChoice 529 education savings plan earn a credit equal to 20% of what you put in, capped at $1,500 per year, or $750 if married filing separately.4Indiana General Assembly. Indiana Code 6-3-3-12 – Credit for Contributions to College Choice Education Savings Plan Hitting the maximum takes $7,500 in contributions during the year. The credit is non-refundable.
Unified Tax Credit for the Elderly
Indiana residents age 65 or older whose household federal adjusted gross income is under $10,000 can claim a flat-dollar refundable credit. If the credit exceeds your tax, the state pays you the difference or applies it to a future bill.5Indiana General Assembly. Indiana Code 6-3-3-9 – Unified Tax Credit for the Elderly The amount depends on filing status and income:
- Single filer or only one spouse age 65 or older: $100 if household income is under $1,000, $50 if between $1,000 and $3,000, and $40 if between $3,000 and $10,000.
- Both spouses age 65 or older: $140 if household income is under $1,000, $90 if between $1,000 and $3,000, and $80 if between $3,000 and $10,000.
Credit for Taxes Paid to Other States
If you’re an Indiana resident who earned income in another state that doesn’t have reciprocity with Indiana, that other state probably taxed those wages. Indiana gives you a non-refundable credit for the tax you paid to the other state on income that Indiana is also taxing, which prevents the same dollar from being hit twice.6Indiana General Assembly. Indiana Code 6-3-3-3 – Taxes Paid to Other States The credit can offset your Indiana tax on that income but cannot take your Indiana bill below zero.
Reciprocity changes this picture for commuters. Indiana has agreements with Illinois, Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin, so wages earned by an Indiana resident in one of those states are taxed only by Indiana, and vice versa.7Legal Information Institute (Cornell Law School). 45 IAC 3.1-1-115 – Reciprocal Agreement States If your out-of-state income is from one of those states, you shouldn’t need this credit; you should file a residency affidavit with your employer so the right state is withholding.
Indiana Earned Income Credit
If you claimed the federal Earned Income Tax Credit, you can also claim an Indiana state EIC equal to a percentage of the federal amount. The state version is fully refundable. You claim it by completing Schedule IN-EIC using the instructions in the IT-40 or IT-40PNR booklet.8Indiana Department of Revenue. Credits
Child and Dependent Care Credit
Indiana offers a credit for taxpayers who paid for the care of a child or other dependent so they could work. You’ll need to attach your federal Form 2441, which lists the care provider’s name, address, and taxpayer identification number.9Internal Revenue Service. Form 2441 – Child and Dependent Care Expenses
How to Claim Them
Full-year residents report deductions on Schedule 2 and credits on Schedule 6 of Form IT-40. Part-year residents and nonresidents use the IT-40PNR, which prorates deductions and credits to Indiana-sourced income.3Indiana Department of Revenue. IT-40 Full Year Resident Individual Income Tax Booklet
Returns can be filed through INTIME, the Department of Revenue’s online portal, through any e-file provider the IRS has approved, through INfreefile at lower income levels, or on paper to the address in the IT-40 booklet.10Indiana Department of Revenue. E-file Options11Indiana Department of Revenue. INTIME Keep rent receipts, property tax statements, 529 contribution records, W-2s, 1099s, and anything else backing a deduction or credit for at least three years from your filing date.12Internal Revenue Service. How Long Should I Keep Records
One boundary worth flagging: none of the state deductions or credits above reduce your county income tax. Every Indiana county levies its own local rate on top of the 2.95% state rate, set by where you lived on January 1 of the tax year, and county rates for 2026 run from 0.50% in Porter County to 3.00% in Randolph County.13Indiana Department of Revenue. Departmental Notice #1 – County Income Tax Rates14Indiana General Assembly. Indiana Code 6-3.6-8-3 – County Residency and Place of Business or Employment Determination County tax applies on the same adjusted base, but the credits above are credits against state tax, not county tax.