You’ve spent decades working, watching those FICA deductions vanish from your paycheck before you ever saw a dime of it. Now that you’re finally collecting, or getting close, the last thing you want is another hand in your pocket. Honestly, the rules for how states handle retirement money are a total mess across the country. But if you’re living in the Hoosier State, or thinking about moving there, you’re probably asking: does indiana tax social security?
The short answer is no. Indiana does not tax Social Security benefits.
But wait. Before you close this tab and go back to your afternoon coffee, there is a lot of nuance you’re probably missing. While the state won't touch your Social Security check, Indiana is famous for its flat tax on almost everything else. And for 2026, the rules just changed again thanks to some fresh legislation.
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The Reality of Social Security in Indiana
Indiana is one of the more "moderately" tax-friendly states for retirees. Basically, they follow a very simple rule: if it’s Social Security or Railroad Retirement benefits, it’s exempt. Even if the federal government decides to tax a portion of your benefits—which happens to a lot of people once their "provisional income" hits a certain threshold—Indiana lets you subtract that amount on your state return.
You’ll use Schedule 2 (or Schedule C if you’re a non-resident) of the Indiana IT-40 form to take this deduction. It’s pretty straightforward. You just take the taxable amount from your federal 1040 and subtract it so your Indiana Adjusted Gross Income (AGI) doesn't include it.
Kinda nice, right?
But here is where people get tripped up. Just because does indiana tax social security has a "no" for an answer doesn't mean your retirement is tax-free. Far from it.
The 2026 "New" State Income Tax Rate
Indiana has been on a bit of a mission lately to lower its flat income tax rate. If you looked at your taxes last year, you probably saw a rate of 3.05%.
Well, as of January 1, 2026, the state income tax rate dropped to 2.95%.
The plan is to keep shaving this down until it hits 2.9% in 2027. While a fraction of a percent sounds tiny, it adds up if you have a significant pension or 401(k) withdrawals. Because while Social Security is safe, your other retirement buckets are not.
What Actually Gets Taxed?
- 401(k) and IRA Distributions: Fully taxable at the 2.95% state rate.
- Private Pensions: Fully taxable.
- Wages: If you’re working a part-time job in retirement, that’s taxed too.
- County Taxes: This is the "hidden" tax in Indiana. Every single county in Indiana has its own additional income tax, ranging from about 1% to nearly 3% (like in Cass or Blackford counties).
So, while the state says "We only charge 2.95%," your actual bill might be closer to 5% once your county gets its share.
Real Examples: How Much Do You Keep?
Let’s look at two different retirees to see how this actually plays out in 2026.
Case A: The Social Security-Only Retiree
Imagine "Mary" lives in Fort Wayne (Allen County). Her only income is $28,000 a year from Social Security.
On her federal return, she likely owes nothing. On her Indiana return, she reports the $28,000 but then deducts the whole thing because it’s Social Security.
Total Indiana Tax: $0.
Case B: The "Mixed Income" Retiree
Now look at "Bob" in Indianapolis (Marion County). He gets $24,000 from Social Security, but he also pulls $30,000 from his traditional IRA.
Indiana won't tax the $24,000. But they will tax the $30,000.
At the 2.95% state rate, he owes $885.
Marion County’s tax rate is currently around 2.02%. That’s another $606.
Total Indiana Tax: $1,491.
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It’s a big difference. Bob is still better off than he would be in a state like Minnesota or Vermont, but he’s definitely not living "tax-free."
Surprising Property Tax Changes for Seniors
There’s some actually good news for 2026 that isn't about income tax. The Indiana General Assembly passed Senate Enrolled Act 1 (SEA 1), and it’s a big deal for homeowners over 65.
For a long time, there was something called the "Over 65 Deduction." It was okay, but it had very strict limits. Starting in 2026, that’s being replaced and expanded with better credits.
Most homesteads (your primary home) are getting a 10% property tax credit, capped at $300. But if you’re a senior, the income limits to qualify for extra relief have been bumped up. If you're a single filer making under $60,000 (or $70,000 for joint filers), you might qualify for the Over 65 Circuit Breaker Credit. This basically prevents your property taxes from jumping more than 2% in a single year, even if home values in your neighborhood go through the roof.
One weird detail: you have to have owned the home for at least a year to qualify for some of these. If you just moved to Indiana to be near the grandkids, you might have to wait a cycle before the big savings kick in.
Misconceptions About "Tax-Friendly" Indiana
People often lump Indiana in with "no income tax" states like Florida or Texas. It’s not that. It’s more like "Low Tax Lite."
One thing that surprises people is the 7% Sales Tax. Indiana has one of the highest state-level sales taxes in the country. They don't have local sales taxes (thankfully), but 7% on almost everything you buy—except for most groceries and prescription drugs—can bite into a fixed budget.
Also, if you’re a veteran, Indiana is actually very friendly. Military retirement pay and survivor benefits are 100% exempt from Indiana’s income tax. If you’re a retired veteran, Indiana is a powerhouse for tax savings compared to its neighbors like Ohio or Illinois.
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Actionable Steps for 2026
If you’re doing your planning for the current tax year, don't just wing it. Here is exactly what you should do to make sure you aren't overpaying:
- Check Your County Rate: Since the state rate dropped to 2.95%, check if your county raised theirs. Some counties use the state’s decrease as an excuse to nudge their own rates up to fund local projects.
- File Form IT-40 Schedule 2: Make sure you (or your software) actually claim the Social Security deduction. It’s not always automatic if you’re using older paper forms.
- Apply for the Senior Property Tax Credit: This is not always automatic. You usually have to file an application with your county auditor. If you’ve turned 65 recently, call the auditor’s office and ask for the "Over 65" paperwork.
- Watch the Federal "Tax Torpedo": Even if Indiana doesn't tax your benefits, the IRS might. If your total income (including half your Social Security) is over $25k (single) or $32k (joint), you’ll pay federal tax. Indiana will let you deduct whatever amount was taxed federally, but you still have to pay Uncle Sam first.
Indiana is a solid place to retire if you want stability. The state's 2.95% flat tax is predictable, and the fact that they keep Social Security off-limits is a huge win for middle-class retirees. Just keep an eye on those county rates and the sales tax at the register—that's where the "hidden" costs of living in the 19th state usually hide.
Next Steps for You:
Check your most recent property tax assessment. If your assessed value is under $240,000 and you're over 65, you are likely leaving money on the table by not filing for the senior circuit breaker credit. Contact your local Indiana County Auditor this week to confirm your eligibility for the 2026 billing cycle.