Indiana’s 2025 Flat Tax: 3% Rate, Withholding, and Future Cuts

Indiana’s state income tax is still a flat tax, and the state has now spelled out two things many newcomers ask about right away: the 3.00% rate that applies for tax year 2025, and the already-enacted rate cuts that follow—2.95% for tax year 2026, then 2.90% for tax year 2027 and after, unless later conditions trigger more cuts. For immigrants, international students, cross-border workers, and the employers who hire them, the rate story is only part of the picture. County income taxes, withholding rules that changed on January 1, 2025, and the right residency form choice can matter just as much as the statewide rate.

What follows is a practical, step-by-step filing journey built around the rules in the source material, with realistic timeframes and the main “checkpoints” where people run into delays or surprise tax bills. According to analysis by VisaVerge.com, state tax clarity is most helpful for globally mobile workers when it comes with clear withholding guidance and clear resident versus nonresident filing paths.

The first decision: residency classification

Plan to spend 30–60 minutes on this step if your year was simple, and longer if you moved, worked in more than one place, or had foreign income.

Indiana generally taxes:
– Full-year residents on all income, even if it came from another state or another country.
– Part-year residents on income earned while living in Indiana.
– Nonresidents on Indiana-source income (such as wages for work physically done in Indiana, business income tied to Indiana, or rent from Indiana property).

For many immigrants, the hardest part is that “resident” can mean different things for different rules. The source material notes that for many international students and temporary workers (such as F-1 and J-1), federal tax residency tests often drive how Indiana expects you to file. If your federal return treats you as a resident, Indiana usually follows that.

Know the rates and why payroll may look different

Give yourself 10–15 minutes to confirm the tax year and the rate you’re actually filing. People often mix up the year they worked with the year they file.

Key state rate timeline:

A flat tax means everyone pays the same percentage on taxable income, with no tax brackets at the state level. Example: if your Indiana taxable income is $40,000, the state tax at 3.00% is $1,200 (before county taxes and credits).

Important payroll note:
– Withholding tables and formulas changed effective January 1, 2025, to reflect the 3.00% rate and updated county rates in some places. That’s why your paycheck withholding may look different even if your salary did not change.

County income tax: the “second rate” many newcomers miss

Budget 20–30 minutes to confirm your county and how it affects withholding. County income taxes are separate from the state flat tax rate, but they are calculated on the same state return.

Key points:
– Many counties impose a local income tax.
– County rates vary widely—from around 0.5% to almost 3%, depending on the county.
– Your county of residence (on January 1 of the tax year) and sometimes your county of employment can affect what applies.
– Some counties, including Floyd, Monroe, and Switzerland, had rate changes reflected in 2025 withholding guidance.

If you moved within Indiana, you can see a mismatch between the county tax withheld and the county tax you actually owe. The practical fixes:
– Make sure your employer has your correct address.
– Keep a record of where you lived at the start of the year.

For official county rate lists and current guidance, start at the Indiana Department of Revenue’s portal: https://www.in.gov/dor/

Gather documents before you touch the forms

Set aside 1–2 hours if you have a W-2 job and basic savings, and more time if you have self-employment income, multi-state work, or foreign income.

Core checklist:
– W-2 forms for wages and Indiana tax withheld.
– 1099 forms for interest, dividends, or contract work.
– Business records if you are self-employed.
– Proof of address (lease, utility bills, official mail) if your residency timeline might be questioned.
– Your SSN or ITIN, and name details that match your federal return.
– Records for credits (ABLE statements, adoption paperwork, disability documentation where relevant).
– A prior-year Indiana return if you have one.

Watch out for identity mismatches: name format differences across documents (federal return, W-2, Indiana filing) can slow refunds and trigger notices. Keep copies of immigration status documents in your personal records, even if you do not upload them with the return.

Picking the right Indiana form

Expect 15–30 minutes for a straightforward choice, longer if you moved mid-year or worked in multiple places.

Indiana’s individual income tax forms:
– Form IT-40 — for full-year Indiana residents. See the official page: https://www.in.gov/dor/individual-income-taxes/indiana-individual-income-tax-forms/
– Form IT-40PNR — for part-year residents and nonresidents. See the official page: https://www.in.gov/dor/individual-income-taxes/indiana-part-year-and-nonresident-forms/

Notes:
– IT-40PNR requires careful allocation of income between Indiana and non-Indiana sources. If you worked in Indiana for only part of the year, or you live outside Indiana but commuted in, this allocation is the heart of the return.

Fill out the return in a steady sequence (with timeframes)

Most filers can finish in 1–3 hours once documents are ready. Part-year and nonresident filings can take longer because of allocation.

Recommended sequence:
1. Start from your federal return numbers. Indiana forms pull many figures directly from federal lines.
2. Apply Indiana adjustments and exemptions. The source material notes 2025 withholding tables use $1,000 per exemption, with higher amounts for certain qualifying dependents and adopted children.
3. Apply the state flat tax rate. For tax year 2025, multiply taxable income by 3.00%. (Remember the scheduled 2.95% rate for tax year 2026.)
4. Compute county tax. Use your correct county rate based on residence/employment rules.
5. Claim credits you qualify for, and keep proof. Credits include ABLE-related credits, disability-related employment credits for businesses, adoption-related benefits, and age-related exemptions (AARP notes an extra $1,000 exemption for taxpayers and spouses age 65 and older, plus an extra $500 under certain income thresholds).
6. Check withholding versus tax due. If too much was withheld, you may be due a refund. If too little was withheld—often because of the wrong county or incorrect nonresident allocation—you may owe.

Filing, payment, and follow-up actions

Plan 15–45 minutes to submit the return, depending on your filing method and whether you also need to make a payment.

Filing paths listed in the source material:
– Online through the Indiana Department of Revenue’s INTIME portal.
– By mail, using the address in the instructions for the year you are filing.

After you file, Indiana may:
– Accept the return and issue a refund (if applicable).
– Send a letter asking for proof of withholding, residency dates, or credit eligibility.
– Assess penalties and interest if tax was not paid by the due date, even if you filed an extension.

Important deadline and warning:

The general deadline is mid-April, aligned with the federal deadline. An extension gives you more time to file paperwork, but it does not give you more time to pay.

Employer withholding: worker checks and HR updates

If you are a wage earner, give yourself 10 minutes each pay period for one month after a move or job change to confirm withholding looks right. If you’re an employer, set aside 1–2 hours for payroll review when rates or county tables change.

From the source material:
– Employers with Indiana operations must withhold Indiana state income tax for work performed in Indiana, using the 3.00% rate for 2025 and the correct county rates.
– Employers hiring immigrants or nonresidents must withhold once the employee is subject to Indiana tax.
– Rate changes are already enacted for 2026 (2.95%) and 2027 (2.90%), so payroll systems should be ready.

Practical tip:
– If you live outside Indiana but work partly on-site in Indiana, keep a simple workday log to document Indiana-source wages.

Long-range planning: conditional cuts beginning in 2030

The source material reports that on April 16, 2025, Governor Mike Braun signed Senate Bill 451 (L. 2025, S451), which allows further rate cuts beginning with tax year 2030 if certain revenue growth tests are met.

Potential future rates (conditional):
– 2.85% for 2030–2031
– 2.80% for 2032–2033
– 2.75% for 2034–2035
– 2.70% for 2036–2037
– 2.65% for 2038–2039
– 2.60% for 2040–2041
– 2.55% for 2042 and later

These cuts are not automatic. The law ties them to general fund revenue growth tests—growth of at least 3.5% in certain comparisons—with tests beginning in fiscal year 2028 and repeating every even-numbered year through 2043.

For immigrant families deciding where to settle, and for founders weighing where to base a business, the practical takeaway is simple:
– Indiana’s flat tax is predictable now at 3.00% for 2025, already scheduled to reach 2.95% in 2026, and may drop further over time—but only if the state meets the law’s revenue triggers.