Indiana's retirement income tax picture is more favorable than it looks at first glance — and more complicated than any single headline captures. The state's 3.0% flat income tax rate (2025) is dropping annually under HEA 1002-2022, on track toward 2.9% in 2026. But the full picture depends on which county you live in, which income sources you draw from, and whether you've applied for the exemptions you qualify for.
This guide covers Indiana's income tax rules as they apply to retirement income — specifically — for buyers evaluating the Indianapolis metro's 55+ communities.
What Indiana Does and Doesn't Tax: The Quick Reference
| Income Source | Indiana State Tax | County Income Tax | Notes |
|---|---|---|---|
| Social Security | EXEMPT | EXEMPT | Fully exempt regardless of income level or age |
| Military Retirement Pay | EXEMPT | EXEMPT | Fully exempt at any age; no income limit |
| IRA Distributions | TAXABLE | TAXABLE | Both traditional and Roth conversion income; Roth qualified distributions may vary |
| Pension Income | TAXABLE | TAXABLE | Private and public pension distributions; state/federal pension same treatment |
| 401(k) / 403(b) Distributions | TAXABLE | TAXABLE | Pre-tax contributions and earnings are taxable at distribution |
| Investment/Dividend Income | TAXABLE | TAXABLE | Capital gains taxed as ordinary income in Indiana (no preferential rate) |
| Part-Time Wages | TAXABLE | TAXABLE | Same treatment as working-age income |
Indiana's State Income Tax Rate: Declining Through 2027
Indiana's flat state income tax rate has been declining since 2023 under legislation that phases the rate down incrementally:
| 2023 | 3.15% |
| 2024 | 3.05% |
| 2025 | 3.00% |
| 2026 (projected) | 2.95% |
| 2027 (projected) | 2.90% |
Future rate reductions are contingent on state revenue triggers — they're not fully guaranteed, though the trajectory has held through 2025. Buyers making 15–20 year retirement cost projections should use the current 3.0% rate as a baseline and note potential downside to ~2.9% rather than assuming further reductions.
The County Income Tax Layer: Where Location Matters
Indiana counties impose their own income tax in addition to the state rate. Unlike some states where county taxes are nominal, Indiana county income taxes are meaningful — ranging from 1.0% to over 3.0% depending on the county. For Indianapolis-area 55+ buyers, the five relevant counties:
| County | County Income Tax | Combined Rate (2025) | Tax on $70K Taxable Income |
|---|---|---|---|
| Hamilton | 1.1% | 4.1% | $2,870 |
| Hancock | 1.0% | 4.0% | $2,800 |
| Johnson | 1.2% | 4.2% | $2,940 |
| Hendricks | 1.5% | 4.5% | $3,150 |
| Marion | 2.02% | 5.02% | $3,514 |
The combined rate difference between Hamilton County (4.1%) and Marion County (5.02%) is 0.92 percentage points. On $70,000 in taxable income, that's $644/year. On $100,000 in taxable income, it's $920/year. Over a 20-year retirement, the gap between living in Hamilton County versus Marion County is $12,880–$18,400 in cumulative income tax — assuming no rate changes, which is a simplifying assumption rather than a guarantee.
What $80,000 of Retirement Income Actually Costs by County
Scenario: retired couple, $30,000 Social Security (exempt), $50,000 IRA distributions (taxable). Total taxable income: $50,000. 2025 Indiana state rate: 3.0%.
| County | State Tax ($50K × 3.0%) | County Tax | Total Annual Tax |
|---|---|---|---|
| Hamilton | $1,500 | $550 (1.1%) | $2,050 |
| Hancock | $1,500 | $500 (1.0%) | $2,000 |
| Johnson | $1,500 | $600 (1.2%) | $2,100 |
| Hendricks | $1,500 | $750 (1.5%) | $2,250 |
| Marion | $1,500 | $1,010 (2.02%) | $2,510 |
Military Retirees: Indiana Is Genuinely Favorable
Indiana's full exemption for military retirement pay — at any age, with no income cap — makes it one of the most military-retiree-friendly states in the country for income tax purposes. A retired E-9 or O-5 drawing $40,000–$60,000 in annual military retirement pay owes $0 in Indiana state or county income tax on that income, plus $0 on Social Security. The only taxable income is anything beyond those two streams (IRA distributions, part-time work, investment income).
Capital Gains: Indiana Taxes Them as Ordinary Income
Unlike federal law, which taxes long-term capital gains at preferential rates (0%, 15%, or 20%), Indiana taxes capital gains as ordinary income — at the same 3.0% state rate plus county income tax. For retirees managing a taxable investment portfolio, this is worth knowing: selling appreciated stock in Indiana doesn't benefit from a lower rate the way it does at the federal level. This doesn't change Indiana's overall tax picture dramatically, but it's a factor in the timing of taxable investment sales.
Ready to Model Your Retirement Tax Picture in Indianapolis?
We can connect you with an agent who understands the county income tax differences and can help you choose the right market for your specific income profile — whether that's Hamilton County, Hancock County, or another option.
Request Agent IntroductionRelated Indianapolis 55+ Research
Indianapolis 55+ Community Guide · Total Cost Comparison: All 23 Communities · Hamilton County Property Tax Guide