Most Popular Tax Deductions in Indiana
As Indiana taxpayers, we all want them: deductions and exemptions. In other words, we are searching for ways to either make our refunds bigger or what we owe smaller. This article highlights the most popular and the biggest payout deductions and exemptions for Indiana income taxes (IT-40) in 2007 (the most recent data available at the time of writing).1
Most Claimed
There were 25 exemptions and deductions available to Hoosiers paying income taxes (see Table 1).
Table 1: Indiana’s 25 Deduction and Exemption Descriptions
| Exemption/Deduction | Description |
|---|---|
| Federal Exemption | Taxpayers are allowed a $1,000 exemption on their Indiana tax return for each exemption claimed on the individual's federal return. |
| Civil Service Annuity Deduction | If a taxpayer's federal adjusted gross income includes federal civil service annuity payments, a deduction may be taken if the taxpayer is at least 62 years of age by December 31st of the tax year. The deduction is equal to the remainder of: (1) the lesser of annuity payments received or $2,000; minus (2) the total amount of social security benefits and railroad retirement benefits received by the individual during the taxable year. Taxpayers filing joint returns may supplement $4,000 in the calculation of Step (1) if both spouses qualify for the deduction. |
| Dependent Child Exemption | An additional $1,500 exemption is allowed for each dependent child. |
| Disability Retirement Deduction | A taxpayer must meet certain disability qualifications to claim this deduction. This deduction is limited to a maximum of $5,200 per qualifying individual. |
| Elderly and Blind Exemption | An additional $1,000 exemption may be taken for certain individuals and their spouses who are either older than age 65 or legally blind. |
| Additional Elderly Exemption | An additional $500 exemption is available for the head of household and/or spouse who are age 65 or older and have a federal adjusted gross income that is less than $40,000. |
| Airport Development Zone Employee Deduction | Certain areas within Indiana have been designated as airport development or enterprise zones. A taxpayer must live in an airport development/enterprise zone and work for a qualified employer in that zone in order to be eligible for these deductions. The amount of the deduction is the lesser of one-half (½) of the earned income shown on Form IT-40 QEC (provided by an employer) or $7,500. |
| Enterprise Zone Employee Deduction | |
| Human Services Deduction | A taxpayer who is a Medicaid recipient living in a hospital, skilled nursing facility, intermediate care facility, or another qualified home or facility may be eligible for this deduction. |
| IN Partnership Long-Term Care Policy Deduction | A deduction is available for the amount of premiums paid during the tax year for Indiana Partnership long- term care insurance. |
| Indiana Lottery Winnings Deduction | The first $1,200 of prize money received from a winning lottery ticket is exempt from the adjusted gross income tax. |
| Indiana Net Operating Loss Deduction | A taxpayer may take a deduction for the Indiana portion of the total federal net operating loss deduction that is carried forward or carried back from previous years. |
| Insulation Deduction | A taxpayer may claim a deduction of up to $1,000 for upgrading (not replacing) insulating items on their principal place of residence. Insulation includes weather stripping, double pane windows, storm doors, and storm windows. |
| Interest on U.S. Govt. Obligations Deduction | A deduction may be taken by a taxpayer if the taxpayer receives certain interest income from a direct obligation of the U.S. Government. The deduction may only be claimed for interest income included in an individual's federal adjusted income. |
| Law Enforcement Reward Deduction | A taxpayer may claim a deduction no greater than $1,000 for certain income related to receiving a law enforcement reward. The income must have been reported as "other income" on the taxpayer's federal income tax form. |
| Medical Savings Account Deduction | A taxpayer may be eligible for a deduction if the taxpayer's employer deposited funds in certain medical care savings accounts on behalf of the taxpayer. The amount of the deduction is equal to the amount of money deposited by an employer in the medical care savings accounts. |
| Military Service Deduction | If a taxpayer's federal adjusted gross income includes active or reserve military pay received, the taxpayer may take a deduction of up to $2,000.Taxpayers filing joint returns may deduct up to $4,000 if both spouses qualify for the deduction. Certain retired military personnel or the surviving spouses of retired military personnel may also take this deduction. |
| Non-Indiana Locality Earnings Deduction | A taxpayer may deduct up to $2,000 for income subject to local taxes in another state. Taxpayers filing joint returns may deduct up to $4,000 if both spouses qualify for the deduction. |
| Railroad Retirement Benefits Deduction | A deduction may be taken for railroad retirement benefits that are issued by the United States Railroad Retirement Board. |
| Recovery of Deductions | Generally, Indiana does not allow taxpayers to claim itemized deductions from the federal income tax form. However, if a taxpayer reported recovered itemized deductions as “other income” on the federal form, that amount may be claimed as a deduction. |
| Renter's Deduction | A deduction of up to $2,500 may be taken for rent paid on an individual's principal place of residence, if the place rented was subject to Indiana property tax. |
| Residential Property Tax Deduction | Taxpayers are eligible to take a deduction of up to $2,500 for Indiana property taxes paid during a tax year on the individual's principal place of residence. |
| Social Security Income Deduction | A taxpayer may claim a deduction for Social Security income. |
| State Tax Refund Reported on Federal Return | A taxpayer may claim a deduction for the state tax refund amount reported on the individual's federal income tax form. |
| Unemployment Compensation Deduction | A taxpayer may be eligible for this deduction if the taxpayer reported unemployment compensation on their federal income tax return. |
Source: Indiana State Budget Agency Tax and Revenue Division
The 10 most popular ones can be seen in Figure 1. By far the most popular was the federal exemption, with more than 3 million Hoosiers claiming that exemption.
Figure 1: Most Popular Tax Exemptions and Deductions in Indiana, 2007
Source: IBRC, using Indiana State Budget Agency Tax and Revenue Division data
Biggest Dollar Amount
Do the most claimed necessarily mean the biggest dollar amounts in deductions? No, but in most cases they are very close when looking at the total payout for all of Indiana. Figure 2 shows the 10 biggest dollar payout exemptions and deductions for all Hoosiers. All but one (Indiana net operating loss deduction) are on the most claimed list, though not in the same order.
Figure 2: Top 10 Overall Tax Exemption and Deduction Payouts in Indiana, 2007
Source: IBRC, using Indiana State Budget Agency Tax and Revenue Division data
The federal exemption was not only the most claimed, but also had the largest payout. The federal exemption resulted in Hoosiers having to pay in $6.2 billion less in Indiana taxes than they would have otherwise had to pay. The Social Security income deduction (saving Hoosiers $3.2 billion in taxes) was second for payout amount and the eighth most popular deduction.
If we look at the exemptions and deductions with the highest average amount per return, we come up with a completely different set of deductions than the most popular or the biggest overall payment (see Table 2). In fact, only two of the deductions that appeared on the most popular list (Figure 1) also showed up in the highest average amount per return. Those included the Social Security deduction ($10,548 average deduction per return) and the dependent child exemption ($2,619 average exemption per return). It is not too surprising, however, to find that the more specific the deduction, the bigger the individual payout.
Table 2: Top 10 Exemptions and Deductions in Indiana by Average Amount per Return, 2007
| Exemptions and Deductions | Number Filed | Average Exemption/Deduction Amount per Return |
|---|---|---|
| Indiana Net Operating Loss Deduction | 6,900 | $58,508 |
| Human Services Deduction | 975 | $13,982 |
| Railroad Retirement Benefits Deduction | 8,924 | $11,869 |
| Social Security Income Deduction | 307,206 | $10,548 |
| Indiana Lottery Winnings Deduction | 4,379 | $7,014 |
| Enterprise Zone Employee Deduction | 3,982 | $6,561 |
| Airport Development Zone Employee Deduction | 38 | $6,317 |
| Disability Retirement Deduction | 2,141 | $4,529 |
| Unemployment Compensation Deduction | 47,658 | $2,954 |
| Dependent Child Exemption | 971,934 | $2,619 |
Source: IBRC, using Indiana State Budget Agency Tax and Revenue Division data
Notes
- Exemptions are generally broader than deductions while deductions aim at reducing the tax burden for certain economic activities (such as renting an apartment or owning a home). Both exemptions and deductions reduce the amount taxpayers pay into the state or increase the amount taxpayers receive as a refund. These data are available from the Indiana State Budget Agency at www.in.gov/sba/files/Individual_Income_Tax_Deductions_and_Exemptions_-_June_2010.pdf.
Molly Manns
Associate Editor, Indiana Business Research Center, Indiana University Kelley School of Business