Indiana Cuts Its Income Tax Rate to 2.95% for 2026
The scheduled reduction took effect January 1. County income taxes remain separate from the lower state rate.
Indiana's individual income tax rate is now 2.95%, down from 3.00% in 2025. The reduction took effect January 1 under the state's previously enacted schedule of annual rate cuts. It applies to 2026 income, while the 2025 returns taxpayers will file this spring still use the 3.00% rate.
The Indiana Department of Revenue (DOR) highlighted its updated withholding guidance in the January 12 Tax Bulletin. Departmental Notice #1 confirms the 2.95% state rate and lists the separate county rates employers use for withholding in the new year.
How Much Does the Lower Rate Save?
The state rate falls by 0.05 percentage point, saving $5 for every $10,000 of Indiana taxable income before credits. Indiana continues to use one flat state rate, so the rate itself does not change with income or filing status.
| Taxable Income | 2025 (3.00%) | 2026 (2.95%) | Savings |
|---|---|---|---|
| $80,000 | $2,400 | $2,360 | $40 |
| $160,000 | $4,800 | $4,720 | $80 |
A single filer with $80,000 of Indiana taxable income saves $40 for the year from the rate cut alone. At $160,000 of taxable income, the saving is $80. Both examples hold taxable income constant and exclude tax credits and county income taxes.
These amounts are taxable income after Indiana adjustments, deductions, and exemptions, not gross salary. A household's final tax bill also depends on those items and any credits it can claim.
County Income Taxes Still Apply
The 2.95% state rate does not include county income tax. A change in a county's rate can offset some or all of the state savings, so a lower state rate does not necessarily mean an equally lower combined tax bill.
The Indiana Department of Revenue's Departmental Notice #1 lists county withholding rates effective January 1, 2026. For Indiana residents, the applicable county generally follows where they lived on January 1. Employees reviewing their pay statements should check state and county withholding separately.
Which Tax Year Uses the New Rate?
The new rate applies to the 2026 tax year, with calendar-year returns generally filed in 2027. Taxpayers estimating their 2026 state income tax should use 2.95% and account separately for county income tax. Another scheduled reduction will bring the state rate to 2.90% in 2027 under current law.
Our Indiana income tax rate page explains the state calculation and provides worked household examples. For available IT-40 returns and instructions, visit our Indiana income tax forms page and select the edition for the tax year you are filing.
References:
- January 2026 Tax Bulletin. January 12, 2026. Includes updated Departmental Notice #1 among the agency's notices. Indiana Department of Revenue. Retrieved September 24, 2026.
- Departmental Notice #1: How to Compute Withholding for State and County Income Tax. Revision R46 / 01-26, effective January 1, 2026. State rate, county withholding rates, and January 1 residence rule. Indiana Department of Revenue. Retrieved September 24, 2026.
- 2024 Tax Expenditure Review. October 2024, printed page 1, Table 1. Reproduces the enacted individual rate schedule under IC 6-3-2-1 and explains the state income tax base. Office of Fiscal and Management Analysis, Legislative Services Agency, Indiana General Assembly. Retrieved September 24, 2026.
- Rates, Fees and Penalties. Confirms the 2026 state rate and scheduled 2027 reduction. Indiana Department of Revenue. Retrieved September 24, 2026.