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Indiana Retirement Tax Friendliness

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Overview of Indiana Retirement Tax Friendliness

Social Security retirement benefits are exempt from the state income tax in Indiana, while income from pensions and retirement savings accounts is not. Indiana has low property taxes and the cost of living is near the U.S. average.

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You will pay of Indiana state taxes on your pre-tax income of
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Quick Guide to Retirement Income Taxes
is toward retirees.
Social Security income is taxed.
Withdrawals from retirement accounts are taxed.
Wages are taxed at normal rates, and your marginal state tax rate is %.
  • Our Tax Expert

    Jennifer Mansfield, CPA Tax

    Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice. SmartAsset’s tax expert has a degree in Accounting and Business/Management from the University of Wyoming, as well as both a Masters in Tax Laws and a Juris Doctorate from Georgetown University Law Center. Jennifer has mostly worked in public accounting firms, including Ernst & Young and Deloitte. She is passionate about helping provide people and businesses with valuable accounting and tax advice to allow them to prosper financially. Jennifer lives in Arizona and was recently named to the Greater Tucson Leadership Program.

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Indiana Retirement Taxes

Photo credit: ©iStock.com/omersukrugoksu

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.

A financial advisor in Indiana can help you plan for retirement and other financial goals. Financial advisors can also help with investing and financial plans, including taxes, homeownership, insurance and estate planning, to make sure you are preparing for the future.

Is Indiana tax-friendly for retirees?

Indiana is moderately tax-friendly for retirees. As described below, Social Security is exempt from the 3.23% flat state income tax in Indiana, while other forms of retirement income are not. The state’s average effective property tax rate is 0.87% and the sales tax rate is 7%, both of which are relatively low.

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, like Warwick and Posey.

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.

How high are property taxes in Indiana?

Photo credit: ©iStock.com/GDacey

The average effective property tax rate in Indiana is 0.87%, which is in the bottom half of the U.S. Home values in Indiana are also relatively low. In fact, the median home value is $130,200, far below the national median. 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 Over 65 Deduction is available to seniors who have owned and occupied their principal residence for at least one year, have a combined income of no more than $25,000 and have an assessed property value of less than $182,430. It is equal to the lesser of $12,480 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.

Most Tax Friendly Places for Retirees

SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.

Highest
Lowest
Rank City Income Tax Paid Property Tax Rate Sales Tax Paid Fuel Tax Paid Social Security Taxed?

Methodology To find the most tax friendly places for retirees, our study analyzed how the tax policies of each city would impact a theoretical retiree with an annual income of $50,000. Our analysis assumes a retiree receiving $15,000 from Social Security benefits, $10,000 from a private pension, $10,000 in wages and $15,000 from a retirement savings account like a 401(k) or IRA.

To calculate the expected income tax this person would pay in each location, we applied the relevant deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at federal, state, county and local levels.

We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.

In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income after subtracting income tax. This product is then multiplied by 35% to estimate the sales tax paid.

For fuel taxes, we first distributed statewide vehicle miles traveled to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.

For each city we determined whether or not Social Security income was taxable.

Finally, we created an overall index weighted to best capture the taxes that most affect retirees. The income tax category made up 40% of the index, property taxes accounted for 30%, sales taxes 20% and fuel taxes 10%.

Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2018 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration