Indiana Tax Guide 2026: Flat Income Tax, County Taxes, and Property Tax Caps

Indiana is one of the few states actively on a path to cut income taxes each year. The flat state income tax rate has been reduced from 3.23% to 2.95% in recent years, with further reductions scheduled to bring it to 3.0% and then 2.9% by 2027 — a deliberate legislative strategy to make Indiana more competitive for businesses and residents. This simplicity of a single flat rate, combined with a genuinely uniform 7% statewide sales tax (no local additions, unlike most states), makes Indiana’s tax structure relatively easy to understand.

The critical complication is Indiana’s county income tax system. Every single one of Indiana’s 92 counties levies its own income tax, ranging from 0.5% to over 3%. Marion County (Indianapolis) charges 2.02%, which means Indianapolis residents pay 2.95% state + 2.02% county = 4.97% combined on income. Hamilton County (Carmel/Fishers) charges 1.1%, for a combined 4.05%. Switzerland County charges 3.38% — the highest in the state — for a combined 6.33%.

Indiana’s property tax system is one of the most structured in the country, with constitutionally mandated caps that prevent taxes from exceeding 1% of assessed value for owner-occupied homes, 2% for agricultural land, and 3% for all other property. This provides genuine protection for homeowners and businesses against runaway local tax increases.

Indiana’s Flat Income Tax and the Path to 2.9%

Indiana’s income tax simplicity is one of its selling points. There is a single flat rate applied to all taxable income — no brackets, no surtaxes on high earners, and no attempt to distinguish between types of income. The current 2.95% rate applies equally to wages, business income, rental income, capital gains, and retirement income (subject to specific exemptions discussed below).

The Rate Reduction Schedule

Indiana’s General Assembly has committed to a series of scheduled rate reductions:

• Current (2025-2026): 2.95%
• Target: 2.9%

This makes Indiana one of the few states actively pursuing income tax reduction as a stated policy goal, similar to Georgia’s movement toward a flat 4.99% and Iowa’s reductions. For long-term residents, the rate will continue to decrease in coming years.

Indiana State Tax vs Neighboring States

County Income Tax: The Hidden Layer

Indiana’s county income tax is often overlooked by people comparing state tax rates. Every county in Indiana levies its own income tax, and the county tax is based on where you live, not where you work (with some non-resident rules). This means the same job paying $100,000 results in very different total tax bills depending on which county you live in.

There are no city-level income taxes in Indiana beyond the county tax. Indianapolis (inside Marion County) does not add a separate city income tax on top of the county rate.

Indiana Sales Tax and Property Tax Caps

Indiana’s 7% Uniform Sales Tax

Indiana’s 7% statewide sales tax is one of the highest state sales tax rates in the country — tied with Tennessee and Mississippi. What makes Indiana’s system distinctive is its uniformity: the 7% rate applies everywhere in Indiana. Unlike almost every other state, Indiana does not allow cities, counties, or municipalities to add local sales tax on top of the state rate. You pay exactly 7% whether you shop in downtown Indianapolis, Fort Wayne, Bloomington, or a rural county.

This uniformity simplifies business compliance and means there are no “tax border” effects where consumers drive to a nearby county to save on sales tax. However, the flat 7% is unambiguously high by national standards.

Indiana Sales Tax Exemptions

• Groceries: Unprepared food items are generally exempt from Indiana sales tax — a significant benefit for lower-income households compared to Tennessee’s 4% grocery tax
• Prescription drugs: Exempt
• Agricultural inputs: Farming equipment, seeds, fertilizers largely exempt
• Manufacturing equipment: Exempt when used directly in production
• Restaurant meals and prepared food: Taxable at 7%

Indiana’s Constitutional Property Tax Caps

Indiana’s property tax caps are enshrined in the state constitution and represent one of the most protective property tax structures in the United States. Article 10, Section 1 of the Indiana Constitution caps property taxes as follows:

• Owner-occupied residential property: Maximum 1% of gross assessed value per year
• Agricultural land: Maximum 2% of gross assessed value per year
• All other property (commercial, rental, industrial): Maximum 3% of gross assessed value per year

This means on a $400,000 home in Indiana, the maximum property tax you can legally be charged is $4,000 per year (1% of $400,000) — regardless of what local school boards, city councils, or county commissions vote to levy. In practice, most Indiana homeowners pay well below the cap.

The constitutional cap is a genuine protection. In states like New Jersey (average ~2.2%), Texas (~1.74%), or Illinois (~2.23%), homeowners face property tax bills 2–3 times higher on comparable properties than in Indiana.

Retirement Income, No Inheritance Tax, and Indiana’s Overall Tax Picture

How Indiana Taxes Retirement Income

Indiana taxes most forms of retirement income at the flat state rate, but provides important exemptions:

• Social Security income: Fully exempt from Indiana income tax — no state tax at any income level
• Military retirement pay: Fully exempt from Indiana income tax
• Qualified pension income exemption: Indiana allows a $6,250 annual deduction per qualifying pension for taxpayers receiving pension income from certain qualifying plans; both spouses can each claim $6,250 if both have qualifying pension income
• IRA and 401(k) distributions: Generally taxable at 2.95% state rate + county tax; the pension exemption may reduce the taxable amount
• Private pensions: Generally taxable unless covered by the qualifying pension deduction

No Inheritance Tax Since 2013

Indiana repealed its inheritance tax effective January 1, 2013. For deaths occurring after that date, Indiana imposes no inheritance tax on heirs regardless of the relationship to the deceased or the value of assets inherited. No estate tax either. Indiana residents benefit from the federal estate tax exemption only ($13.61M per individual in 2024), and most Indiana estates pass completely free of transfer taxes at any level.

Indiana Total Tax Burden: An Honest Assessment

Indiana is often cited as a relatively low-tax state, and for middle-income earners this is generally accurate — particularly on property taxes. However, the combination of state income tax + county income tax + 7% sales tax creates a meaningful tax burden for typical families. The groceries exemption from sales tax is a significant offset for lower-income households.

For high earners, Indiana’s income tax burden is significant but far below California (13.3% top rate) or New York (10.9% top rate). The property tax caps provide meaningful protection for homeowners. The 7% sales tax is high but uniform, and the grocery exemption reduces its impact on everyday spending.