Understanding Indiana Capital Gains Tax and Your State Tax Obligations

Indiana residents and anyone earning income within the state need to understand their tax responsibilities. The state applies a flat income tax rate of 3.23% across the board, meaning whether you earn $30,000 or $300,000, you pay the same percentage. What many people don’t realize is that Indiana capital gains tax follows the same rule—your investment profits are taxed at that same 3.23% rate, not at a special lower rate like some other states offer.

Who Pays Indiana Taxes?

If you live in Indiana full-time or part-time, you’re considered a resident and must file. Nonresidents also have to pay if they earn money from Indiana sources. There’s one important exception: residents of neighboring states (Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin) who work in Indiana only pay taxes to their home state, not to Indiana.

The 3.23% Flat Tax Rate Explained

Indiana’s approach is straightforward—everyone pays the same percentage regardless of income level. This applies to wages, self-employment income, and yes, Indiana capital gains tax on investment profits. Whether it’s stock sales, rental property gains, or other capital appreciation, the 3.23% rate applies uniformly.

Income Tax Deductions That Actually Help

Housing-Related Deductions

Renters can deduct up to $3,000 annually, but only for your primary residence—vacation homes and student housing don’t qualify. If your landlord is a government entity, nonprofit, or cooperative, unfortunately this deduction isn’t available to you.

Homeowners get their own break through a residential property tax deduction capped at $2,500 for taxes paid on their principal residence.

Education and Family Support

Parents spending on private school or homeschooling can deduct $1,000 per dependent child. If you contributed to a CollegeChoice 529 education savings plan, you can claim a credit for that contribution amount.

Other Notable Deductions

Disability retirees may deduct up to $5,200 of their disability retirement payments if they retired before December 31 of the tax year while permanently and totally disabled. Those who received unemployment benefits can deduct a portion of that compensation—check your 1099G form and use the IT-40 worksheets for calculations.

Tax Credits That Reduce What You Owe

The Earned Income Credit

Indiana’s earned income credit (IN-EIC) mirrors the federal version and maxes out at $538. Eligibility depends on income limits and dependent status:

• Single filers with no dependents must earn under $15,900 (and be between 24-65 years old)
• With one child, the limit rises to $42,100
• With two or more children, it goes up to $47,900

Dependents generally must be under 19 (or under 24 if enrolled in school full-time).

Other Credits Worth Claiming

Adoptive parents can claim up to 10% of their federal adoption credit or $1,000 per child, whichever is less. Public school educators in Indiana can claim up to $100 for classroom supply expenses (up to $200 for married couples filing jointly where both qualify). Seniors aged 65 or older with income under $10,000 can claim the unified tax credit for the elderly, ranging from $40 to $140.

Sales Tax, Property Tax, and Capital Gains Considerations

Indiana’s sales tax rate stands at 7% statewide, though property tax rates vary by county and local jurisdiction. Nonprofits, educational institutions, and religious organizations may qualify for property tax exemptions if their property is used for educational, scientific, literary, charitable, or religious purposes.

When it comes to Indiana capital gains tax, remember that long-term and short-term capital gains face the same 3.23% rate. This differs from federal taxation, where long-term capital gains typically receive preferential rates. Indiana’s flat approach means investment income is treated no differently than wages.

Estate and Inheritance Tax: Good News

Here’s one pleasant surprise for Indiana residents: the state has no inheritance tax or estate tax. Depending on your situation and federal liability, this can mean significant savings for your heirs.

Putting It All Together

Indiana’s tax system is designed to be simple and predictable with its flat 3.23% rate applying to both regular income and Indiana capital gains tax. The state then layers in deductions and credits to help taxpayers reduce their overall burden. If you’re planning your taxes or considering a move to Indiana, understanding these mechanisms—particularly how Indiana capital gains tax works at the state level—helps you make informed financial decisions. Take advantage of available deductions for housing, education, and family situations, and don’t overlook lesser-known credits like the earned income credit or educator expenses.