Social Security retirement benefits are exempt from the state income tax in Indiana, while income from pensions and retirement savings accounts are not. Indiana has low property taxes and the fourth lowest average cost of living in the U.S.
Annual Social Security Income
Annual Retirement Account Income
Year of Birth
Annual Income from Private Pension
Annual Income from Public Pension
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|Public pension income is taxed, private pension income is taxed.|
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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
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 low property taxes and the fourth lowest average cost of living in the U.S.
On the other hand, the Hoosier State does tax retirement income from pensions and retirement savings accounts. Read on to learn more about the taxes (and tax breaks) retirees in Indiana will face.
Is Indiana tax-friendly for retirees?
Indiana is moderately tax-friendly for retirees. As described below, Social Security is exempt from the state income tax in Indiana, while other forms of retirement income are not. The state’s average property tax rate is 0.88%. The sales tax rate is 7%.
Is Social Security taxable in Indiana?
No. 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?
Yes. Pension income, 401(k) income, IRA income and income from any other form of retirement savings accounts are all taxable. They are included as part of your taxable income and taxed at Indiana’s flat income tax rate of 3.3%.
How high are property taxes in Indiana?
Relatively low. The average effective property tax rate in Indiana is 0.88%. Home values in Indiana are also relatively low. The median home value is $122,800, far below the national average. That means senior homeowners in Indiana can expect their housing costs to be 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 own and occupy their principal residence, have a combined income of no more than $25,000 and assessed property value of less than $182,430. It is equal to $12,480, 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?
Moderate. There are no local sales taxes in Indiana and the state rate is 7%. That is slightly higher than average across all 50 states. However, the 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?
Indiana does collect excise taxes on products like gasoline, alcohol and cigarettes. However, given that Indiana has a cost of living more than 10% below the national average, these taxes have little effect on overall expenses.
The Hoosier state does not have an estate or inheritance 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.
Methodology Our study aims to find the areas with the most tax-friendly policies for retirees. To do that we looked at how the tax policies of each city would impact a retiree with a $50,000 income. Our hypothetical retiree is getting $15,000 from Social Security benefits, $10,000 from a private pension, $15,000 from retirement savings like a 401(k) or IRA and $10,000 in wages.
To calculate the expected income tax this person would pay in each location we applied 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 the 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 less 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 down 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. We gave a 4x weighting to income tax, 3x weighting to property tax rate, a 2x weighting to sales tax and 1x weighting to fuel tax.
Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2016 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration