Military pay and Indiana state tax

Does the state tax personal income?

The Department of Revenue states that Indiana imposes an adjusted gross income tax on individuals and publishes Information Bulletin #27 to describe how that tax applies to personnel of the U.S. military and their spouses, citing IC 6-3-1-2.5, IC 6-3-1-3.5, IC 6-3-1-34 and IC 6-3-2-4.

Active duty pay

The bulletin states that for 2023 and earlier Indiana resident regular members of the armed forces were subject to tax on all income regardless of source, and that for 2024 and later Indiana resident regular members of an active component are exempt from income tax on their wages derived from their service in the armed forces while remaining subject to tax on all other income regardless of source. It states that in this context wages include any form of compensation for military service and do not include retirement or disability income from military service.

Stationed outside the state

The bulletin states that military personnel who enter the armed forces as Indiana residents remain legal residents of Indiana regardless of duty station until official action is taken to change legal residence, which can be accomplished by filing a State of Legal Residence Certificate, Form DD 2058, with the military personnel office, and that nonresident regular members are subject to tax only on non-military income received from Indiana sources because military earnings for active duty are not considered to be from an Indiana source.

Combat pay

The bulletin states that military income received due to service in a combat zone is not subject to tax on an individual's federal or state income tax return, that combat zone compensation is excluded from the income reported on the Indiana resident return, that because such income is already excluded it is not eligible for the National Guard and reserve component deduction, and that a member serving in a combat zone has an automatic extension of 180 days after leaving the combat zone, beginning on release from hospital where hospitalized outside the United States as a result of that service.

Military retirement pay

The bulletin states that military retirement pay received by an Indiana resident is deductible in full for Indiana tax purposes, that as of January 1, 2025 this includes retirement pay from the United States Space Force, the United States Public Health Service Commissioned Corps and the National Oceanic and Atmospheric Administration Commissioned Officer Corps, that a portion of a service member's military retirement pay received by a divorced spouse under a divorce decree or similar agreement is not deductible for that spouse, and that the individual need not have been an Indiana resident during active military service for the adjustment.

Survivor benefits

The bulletin states that the full military retirement deduction is available both to the military member and to the military member's surviving spouse, that military withholding statements or retirement survivor's benefits statements must be enclosed with the return when these deductions are claimed, and that where a combination of military pay, retirement pay and military survivor's benefits is received during the tax year a separate deduction can be qualified for in all categories provided military pay is reported separately from retirement pay and survivor's benefits.

Guard and Reserve

The bulletin states that for 2022 and earlier a member of a reserve component or of the National Guard was allowed a deduction for wages earned as a result of service on involuntary orders, or when mobilized and deployed for full-time service, or during the period for which the member's National Guard unit was federalized, and that for 2023 and later the deduction reaches wages earned as a result of the member's military service, including National Guard state active duty and wages earned as a military technician (dual status), regardless of mobilization, deployment or federalization. It states that wages earned as a federal civilian employee other than as a military technician (dual status), income received as an independent contractor, and wages from employment not paid for service in the reserve component or National Guard are not exempt, that service members serving on full-time orders in an Active Guard and Reserve Program are not considered mobilized for purposes of qualified military income under IC 6-3-1-34, and that for 2023 and later such members may not also claim the Military Service Deduction under IC 6-3-2-4 on those wages.

Military spouses

The bulletin states that Indiana adjusted gross income tax applies to all income of a domiciled spouse of an armed forces member regardless of source, that under 50 U.S.C. § 4001(c) it does not apply to the earned income of a non-domiciled spouse, and that a spouse electing to be treated as an Indiana resident under 50 U.S.C. § 4001(a)(2)(B) is subject to Indiana income tax on the spouse's income. It states the four stated circumstances in which a spouse is exempt from Indiana taxation on Indiana-source earned income and describes the Nonresident Military Spouse Earned Income Deduction equal to the amount of Indiana earned income, claimed on Form IT-40PNR Schedule C with Schedule IN-2058SP enclosed.

Filing

The bulletin states that resident military personnel are required to file an Indiana income tax return if gross income exceeds exemptions and that income from all sources, military and non-military, excluding military combat zone compensation, is reported on Form IT-40 even if deducted in full, that nonresident military personnel are required to file if they receive any income from an Indiana source and should use Form IT-40PNR, that a person with income subject to tax by two states is allowed a credit in one state for tax paid to the other, that returns are due on or before April 15 of the following year, and that military personnel on active duty outside the United States and Puerto Rico are allowed an automatic 60-day extension with an enclosed statement.

Withholding

The bulletin states that a military person who expects to owe $1,000 or more in state and/or county income tax may be required to make estimated tax payments in instalments, that generally the military will withhold Indiana state income tax from military earnings of resident military personnel in an amount sufficient to avoid estimated tax payments on military earnings, and that local income tax is not withheld, so other income not subject to withholding could result in $1,000 or more of state and/or local income tax due for the year and a penalty for underpayment of estimated tax.

• Expecting to owe $1,000 or more in state and/or county income tax may require estimated tax payments — tax year 2025