Indiana taxes for early retirees: a 2.95% flat tax, a county surprise, and no death taxes

By Tom, CPA · Updated October 29, 2026

TL;DR: Indiana taxes IRA, 401(k), pension and capital gain income at a flat 2.95% for 2026 plus a county tax of 0.50% to 3.00%. Social Security is exempt and there is no estate or inheritance tax.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Indiana's pitch to retirees is basically a Midwestern shrug: "We're cheap, we're flat, and we won't make it weird." The state income tax rate is 2.95% for 2026 and is already scheduled to slide to 2.90% in 2027. Social Security is fully exempt. There's no estate tax and no inheritance tax. So far this reads like a brochure.

Then the county shows up. Every Indiana county adds its own income tax on top, from 0.50% to 3.00%, and Indiana has no general break for IRA, 401(k) or private pension income at any age. This guide covers the 2026 numbers for early retirees: rates, what's taxed, exemptions, property tax relief, estate rules, and residency. Our guides are Frugal Fran, who has opinions about the price of sweet corn, and Lavish Larry, who thinks "cornfield" is a golf course with poor drainage.

CPA Warning Label: Your county tax is set by where you lived on January 1, and counties can change rates mid-year, so a cheap state rate can hide a 3% county bill.

The 2026 rate: one flat state rate plus a county rate

Indiana taxes adjusted gross income at a single state rate. The Indiana Department of Revenue lists the individual rate as 2.95% for 2026, falling to 2.90% for 2027. No brackets, no bracket creep, no spreadsheet tabs labeled "Bracket 4 (why)."

Then add county income tax. Your county rate is based on where you lived on January 1 of the tax year, and the Departmental Notice #1 effective October 1, 2026 shows county rates from 0.50% (Porter County) to 3.00% (Randolph County). So the all-in Indiana rate runs from 3.45% to 5.95% depending on your county. Moving from one county to the next on January 2 doesn't change that year's county; the January 1 rule decides it.

Counties can adjust rates in January and October, so check the current notice for your county before you budget. A 2.5-point spread between counties is real money: on $80,000 of taxable income that's $2,000 a year, which is a lot of sweet corn.

What Indiana taxes: IRA and 401(k) yes, Social Security no

Indiana starts with federal adjusted gross income and then applies its own add-backs and deductions. Here's how the common early-retiree income types land:

• Traditional IRA and 401(k) withdrawals: taxable at the state and county rates. Indiana has no age-based retirement income exclusion for these accounts.
• Roth conversions: taxable in the year of conversion, same as other IRA income. At 2.95% plus county tax, Indiana is a reasonably cheap place to run a Roth conversion ladder.
• Qualified Roth withdrawals: not in federal AGI, so not taxed by Indiana either.
• Social Security and Railroad Retirement: deducted in full. The Department of Revenue lists the Social Security and Railroad Retirement benefits deduction for seniors.
• Military retirement pay: deductible under the military retirement pay deduction.
• Federal civil service annuities: if you're 62 or older by year-end, you can deduct the lesser of your taxable civil service annuity or $16,000, minus your Social Security and Railroad Retirement benefits (IT-40 deduction code 601).
• Capital gains, dividends and interest: taxed as ordinary income at the same flat rates. No special capital gains rate, but at 2.95% you won't need one.

The flat rate cuts both ways. Selling $200,000 of appreciated index funds in one year costs the same percentage as selling $20,000. That's great for people who want to realize big gains in one year, and irrelevant for people who were hoping for a 0% bracket like the federal one.

Exemptions instead of a standard deduction

Indiana doesn't have a standard deduction. Instead it gives small per-person exemptions:

Yes, those are small. A married couple under 65 gets $2,000 of exemptions total. That's why Indiana's low rate doesn't translate to $0 tax at low incomes the way a big standard deduction would. The Unified Tax Credit for the Elderly also exists for some 65+ filers who meet its requirements, but it's aimed at very low incomes.

Illustration: Frugal Fran and her husband are both 60 and file jointly for 2026. Assumptions: $50,000 of IRA withdrawals, $30,000 of long-term capital gains, no other income, and a county rate of 1.50% (a hypothetical rate inside the 0.50% to 3.00% range). Indiana income is $80,000 minus $2,000 of exemptions, or $78,000. State tax is 2.95% of $78,000, or $2,301.00. County tax is 1.50% of $78,000, or $1,170.00. Total: $3,471.00, an effective rate of about 4.3% on $80,000.

Illustration: Lavish Larry and his wife are both 66 and file jointly for 2026. Assumptions: $40,000 of Social Security, $60,000 of IRA withdrawals, the same hypothetical 1.50% county rate. Social Security is deducted in full, so Indiana income is $60,000. Exemptions are $2,000 for the two of them plus $2,000 for being 65 or older; they don't get the extra $500 each because federal AGI is over $40,000. Taxable income is $56,000. State tax is $1,652.00 and county tax is $840.00, so $2,492.00 total. Larry spends the savings on a golf cart with cupholders that also fit sweet corn.

Property tax: caps, shrinking deductions and an over-65 credit

Indiana property tax is where the state gets creative. Three things matter for homeowners:

• Circuit breaker cap. Property taxes on a homestead are capped at 1% of gross assessed value (2% for other residential property and farmland, 3% for most other property), according to the Department of Local Government Finance fact sheet.
• Homestead deductions are being rebuilt. Under SEA 1-2025, the homestead standard deduction is phasing down: $48,000 for the 2025 assessment date, $40,000 for 2026, $30,000 for 2027, $20,000 for 2028, $10,000 for 2029 and $0 from 2030. At the same time, the supplemental homestead deduction rises: 40% of the remaining assessed value for taxes payable in 2026, then 46%, 52% and 57% for 2027 through 2029.
• Over 65 Credit. For taxes payable in 2027, the Over 65 Credit is $150. You must be 65 by December 31, 2026, have owned the property at least one year, live there, and have federal AGI of no more than $60,000 single or $70,000 joint. Apply with the county auditor by January 15.

There's also an Over 65 Circuit Breaker Credit that limits how fast an eligible senior's homestead tax can rise, with the same style of income test. These programs change often in Indiana, so confirm the current rules with your county auditor before you assume a number.

Sales tax isn't a big swing factor for the income-tax decision here; confirm the current rate on the Department of Revenue site if you're budgeting big purchases.

Estate and inheritance tax: none

Indiana repealed its inheritance tax for deaths after December 31, 2012, according to the Department of Revenue, and it has no separate state estate tax. The only death tax most Hoosiers will ever think about is the federal estate tax, which kicks in at amounts well above most FIRE portfolios (see estate tax basics). Your heirs inherit your IRA and still owe Indiana income tax on the withdrawals, so a Roth conversion strategy still has value for legacy planning.

Residency, county rules and estimated payments

If you move into or out of Indiana, you file as a part-year resident, and the state taxes income you received while you lived there. County tax is decided by your county on January 1, so someone who moves in on January 2 can owe little or no county tax for that first year if they had no Indiana county on January 1. For more on making a move stick, see changing your state residency.

Retirees without withholding usually need estimated payments. The Department of Revenue says you must make estimated payments if you expect to owe more than $1,000 in state and county tax after withholding. Installments are due April 15, June 15, September 15 and January 15. Many IRA custodians will withhold Indiana tax if you ask, which is the lazy and effective option.

Is Indiana a good state for early retirees?

For most FIRE households, yes. The combined state and county rate is lower than in most neighboring states, Social Security is fully exempt, and there's no estate or inheritance tax. The weak spots are the lack of any IRA or 401(k) exclusion and the small exemptions. Compare it with Ohio, Illinois (which exempts retirement income but has high property taxes) and Michigan before you pack the minivan.

If you have a big traditional IRA, Indiana is a reasonable place to convert it to Roth during the gap years before Social Security, while keeping an eye on the federal Social Security tax torpedo.