Indiana Deductions from Income
Indiana deductions are used to reduce the amount of income Indiana will tax.
First, check the list below to see if you're eligible to claim any of the deductions. If you are, you'll claim them when you file your annual Indiana income tax return - Form IT-40, IT-40PNR, or IT-40RNR.
Important: Some deductions available for earlier tax years may not be listed below. If you need information for prior tax years; for tax year 2009 going forward, review the Schedule 2 deductions area in the IT-40 instruction booklet; for tax year 2008 or before, review the Schedule 1 deductions area in the IT-40 instruction booklet.
- Civil service annuity deduction
- Disability retirement deduction
- Enterprise zone/Airport development zone deduction
- Human services tax deduction
- Indiana partnership long term care policy premiums deduction
- Insulation deduction
- Interest from U.S. government obligations deduction
- Law enforcement reward deduction
- Lottery winnings deduction
- Military service deduction: Active, reserve and retirement pay
- National Guard and Reserve Component Members Deduction
- Nonresident Military Spouse Earned Income Deduction
- Recovery of itemized deductions, including state tax refund
- Renter's deduction
- Residential homeowner's property tax deduction
- Social Security and railroad retirement benefits deduction
- Unemployment compensation deduction
If you received a civil service pension (nonmilitary*) and are at least 62 years of age, then you may be eligible for up to a $2,000 deduction.
For more details, view Information Bulletin #6.
*See Military service deduction: Active, reserve and retirement pay for information about the taxability of military pension income.
To qualify for this deduction you must have:
- Been permanently and totally disabled at the time of your retirement;
- Retired on disability; and
- Received disability retirement income.
Certain areas within Indiana have been designated as enterprise zones and airport development zones. These zones are established to encourage investment and job growth in distressed urban areas.
If you lived in and were an employee in one of these zones, and worked for a qualified employer in that zone, you may be eligible to claim a deduction. Your employer will provide you with a form IT-40QEC if you're eligible to claim this deduction.
If your employer provided the form IT-40QEC to you, your deduction will be one-half of the earned income shown on that form, or $7,500, whichever is less. Make sure to keep the IT-40QEC with your records as the Department may request it at a later date.
You might be able to take this deduction if you lived in Indiana and:
- Received Medicaid payments;
- Were not living at home; and
- Were receiving care in a hospital, skilled nursing facility, an intermediate care facility, licensed county home, licensed boarding or residential home, or a certified Christian Science facility.*
If you meet the above requirements, see the instructions for Schedule 2, line 11 in the individual income tax booklet to see if you're eligible to claim the deduction and to help you figure it.
*An eligible Christian Science facility must be listed with and certified by the Commission for Accreditation of Christian Science Nursing Organizations/Facilities, Inc.
Indiana has a Long Term Care Insurance Program, which is an innovative partnership between the State of Indiana and private long-term care insurance companies. The premiums paid for this policy are eligible for a deduction.
The Indiana Partnership policy will have the following box of information on the outline of coverage, the application, or on the front page of the policy:
This policy qualifies under the Indiana Long Term Care Program for Medicaid asset protection. This policy may provide benefits in excess of the asset protection provided in the Indiana Long Term Care Program.
Find out more about this program.
If you installed new insulation, weather stripping, double pane windows, storm doors or storm windows in your Indiana home you may be eligible to take this deduction.
For more details, view Information Bulletin #43.
If you've included any interest from U.S. government obligations on your Indiana tax return, you're eligible for a deduction.
Examples of U.S. government obligations include U.S. Savings Bonds, U.S. Treasury Bills and U.S. Government Certificates. This interest is usually reported on federal Schedule B.
For more information about this deduction, view Information Bulletin #19.
Generally, "rewards" are fully taxable. However, your deduction is the lesser of the amount received, or $1,000:
- If you received a reward for providing information to a law enforcement official or agency;
- If the information assisted in the arrest, indictment, or the filing of charges against a person; and
- If you are not compensated for investigating crimes, the person convicted of the crime or the victim of the crime;
Some winnings issued by the Hoosier Lottery Commission may be taxed by Indiana.
If you win any prize money from the Indiana Hoosier Lottery Commission, by winning:
- An instant game;
- From appearing on the Hoosier Millionaire show; or
- An on-line game such as Hoosier Lotto, Powerball, Lucky 5, Daily 3 & 4, Max 5, etc., you may be eligible for a deduction.
Important: Winnings from other state lotteries, Indiana pari-mutuel horse races or out-of-state tracks, Indiana or out-of-state riverboats, and other gambling winnings, are fully taxable in Indiana and should not be deducted from your taxable income.
You are eligible to take a deduction if the income you report on your income tax return includes active or reserve military pay.
Also, if you are retired from the military or are the surviving spouse of a person who was in the military, you may be able to take this deduction if:
- You were at least 60 years of age by the end of the year;
- You were receiving military retirement or survivor's benefits during the year; and
- The total benefits received as retirement income were reported on your federal return.
This deduction is equal to the actual amount of military income received (i.e. military pay, retirement pay, and/or survivor's benefits) or $5,000, whichever is less. If both you and your spouse received military income, you may each claim the deduction for a maximum of $10,000.
Note: Military income earned while in a combat zone may be exempt (not taxed) on your federal income tax return. If that income is exempt on your federal income tax return, then it will also be exempt (not taxed) for Indiana income tax purposes. Since Indiana isn't taxing this income, your combat zone income is not eligible for a deduction.
Important: If you received both military pay and retirement pay or survivor's benefits during the tax year, the total deduction cannot be greater than $5,000 per qualifying person. For example, if you earned $6,000 in military pay the first half of the year and $1,500 in retirement pay the second half of the year, you can deduct only $5,000 of your income.
There is a deduction for certain members of the reserve components of the Army, Navy, Air Force, Coast Guard, Marine Corps or the Merchant Marine, or a member of the Indiana Army National Guard or the Indiana Air National Guard.
A deduction is available for the income received as a result of service on involuntary orders during the period the above members were deployed or mobilized for full-time service, or during the period the above member's Indiana National Guard unit was federalized.
See instructions in the IT-40 Instruction booklet for more information.
The Military Spouses Residency Relief Act (P.L. No. 111-97) was signed into law on Nov. 11, 2009. This law allows a military servicemember’s spouse to keep a tax domicile throughout the marriage, under certain conditions, and applies to income earned after Dec. 31, 2008.
An Indiana nonresident military spouse may be eligible for a deduction if:
- Indiana is not the military servicemember’s state of domicile as reported on the servicemember’s Form DD-2058;
- The military servicemember and spouse are domiciliaries of the same state;
- The military servicemember is in Indiana on military orders;
- The military servicemember’s spouse is in Indiana in order to live with the servicemember, and resides at the same address; and
- The Indiana-source earned income is included on Indiana Schedule A on line 1B, 2B and/or 7B.
Earned income for purposes of this deduction includes:
- Wages, salaries, tips and other compensation from Indiana sources, and/or
- Income from a sole proprietorship (reported on federal Schedule C or C-EZ) from Indiana sources.
To determine if you are eligible to claim this deduction complete Schedule IN-2058SP (Nonresident Military Spouse Earned Income Deduction).
This deduction is available for tax year 2009 and beyond, and may be claimed if you are filing Form IT-40PNR (for full-year and part-year Indiana nonresidents).
If you included 'recovered' itemized deductions as other income on your federal income tax return, then that amount should be deducted on your Indiana income tax return.
You may be able to deduct up to $3,000 of the rent paid on your Indiana home.
You may be able to take this deduction if:
- You paid rent on your principal place of residence, and
- The place you rented was subject to Indiana property tax.
Your "principal place of residence" is the place where you have your true, fixed, permanent home and where you intend to return after being absent.
Rent paid for summer homes or vacation homes is not deductible.
You cannot claim the renter's deduction if the rental property was exempt from Indiana property tax. Examples of this type of property are:
- Government owned housing;
- Property owned by a nonprofit organization;
- Student housing;
- Property owned by a cooperative association; and
- Property located outside of Indiana.
How much rent can I take off? You can deduct up to $3,000 or the amount of rent paid, whichever is less.
Example: Emily paid $4,800 in rent on her principal residence. She will claim a $3,000 renter's deduction.
Example: Bill paid $400 in rent at his first apartment, moved to another location and paid $3,300 for the remainder of the year. His deduction will be limited to $3,000 even though he paid $3,700 altogether.
For more information about this deduction, view Information Bulletin #38.
You may be eligible to take a deduction of up to $2,500 of the Indiana property taxes (residential real estate taxes) paid during the year on your principal place of residence.
Your "principal place of residence" is the place where you have your true, fixed home and where you intend to return after being absent.
Note: Property tax paid for summer homes or vacation homes is not deductible.
No double benefit allowed. If any portion of property taxes paid on your principal residence was deducted as an expense on federal Schedule C, C-EZ, E or F, then that amount cannot also be deducted. See the following example.
Example: Jean used one room of her home for her business. She deducted $200 Indiana property tax as an expense on her federal Schedule C. She paid a total of $1,200 Indiana property tax on her home. Jean's deduction will be $1,000 ($1,200 minus the $200 deduction on federal Schedule C).
How do I find out how much Indiana property tax I paid on my principal residence? Indiana counties annually send statements to homeowners showing how much property tax is due on their property. Add together the spring and fall installments if you paid both of them.
Sometimes mortgage companies pay the Indiana property tax from an escrow account. If your mortgage company pays it, they should send you a Form 1098 (or its equivalent) showing the amount of property tax paid.
If you can't locate the information, contact your local county treasurer's office or your mortgage company.
Indiana does not tax Social Security and railroad retirement benefits.
All Social Security benefits and/or railroad retirement benefits (issued by the Railroad Retirement Board) included in the income taxed on your federal income tax return should be deducted on your Indiana tax return.
For more information about this deduction, view Information Bulletin #26.
Indiana may tax a smaller amount of unemployment compensation than what is being taxed on your federal income tax return.
For more information about this deduction, view Information Bulletin # 60.