Indiana Retirement Tax 2026: Social Security Free, Pensions Taxed

If you’re weighing a retirement move across the river, this is usually the first tax question. Indiana’s answer is simpler than Kentucky’s, but it isn’t always cheaper.

Key terms, in plain English

Does Indiana tax Social Security?

No. Indiana lets you deduct all Social Security benefits included in your federal income, so they aren’t taxed by the state or your county.

That’s the same as Kentucky. For retirees living mainly on Social Security, neither state’s income tax is likely to be a deciding factor. Property taxes, insurance and the home itself matter more.

Does Indiana tax pensions, IRAs and 401(k) withdrawals?

Yes. Pension payments, IRA distributions and 401(k) withdrawals count as taxable income in Indiana. They’re taxed at the state rate plus your county rate.

Indiana’s state rate is falling slowly under current law:

Source: Indiana Code 6-3-2-1. Further cuts after 2029 depend on state revenue targets.

Then the county tax is added. In Southern Indiana:

Source: Indiana DOR Departmental Notice #1, effective October 1, 2026.

How it works: Indiana has no retirement income exclusion like Kentucky’s. Every dollar of pension or IRA income above your exemptions is taxed at the combined rate. Indiana does have small exemptions: $1,000 per person, plus $1,000 for each person 65 or older, plus another $500 each if federal AGI is under $40,000. For a married couple both 65+, that’s $4,000 to $5,000 off taxable income, worth about $200 to $250 in state and county tax. Helpful, but nothing like Kentucky’s $31,110 per person.

Is military retirement pay taxed in Indiana?

No. Since 2022, Indiana lets you deduct 100% of military retirement and survivor benefits received while you’re an Indiana resident. As of 2025, that includes the Space Force, the Public Health Service Commissioned Corps and the NOAA Commissioned Officer Corps.

For military retirees around Fort Knox and Elizabethtown weighing a move north, this is one of Indiana’s clearest advantages. Kentucky fully exempts military retired pay only for those who retired before 1998; later retirees share Kentucky’s $31,110 exclusion (more if part of their service was before 1998). So for post-1997 retirees with a military pension above $31,110, Indiana comes out ahead. See our VA loan guide for Fort Knox, Elizabethtown and Radcliff if you’re buying with VA benefits.

Federal civil service retirees 62 or older can deduct up to $16,000 of their annuity, reduced by any Social Security received.

What would a Southern Indiana retiree actually owe? (illustrative)

It depends almost entirely on how much of your income comes from pensions and retirement accounts.

Three married couples, both spouses 65+, living in Clark County (4.95% combined rate in 2026):

The math, step by step (Couple C)

Illustrative. Figures are before each state’s exemptions or standard deduction and before any credits. For a 65+ couple, Indiana’s $4,000 in exemptions would lower Couple C’s Indiana tax by about $198, to roughly $3,762 ($76,000 × 4.95%), and Couple B’s by the same amount, to about $1,287. Kentucky’s standard deduction lowers its figures slightly too. Social Security is excluded in both states. Not tax advice.

The takeaway: Couple C pays roughly $3,300 a year more in Indiana income tax, about $278 a month. Couple A pays nothing in either state. That’s location ≠ strategy: the right side of the river depends on where your income comes from.

Does Indiana’s lower property tax make up the difference?

Sometimes. Indiana caps homestead property taxes at 1% of assessed value and added a credit of up to $300 in 2026. Seniors may qualify for a $150 credit and a credit that limits yearly bill increases to 2%.

On a $300,000 home in a capped Southern Indiana city district, the property tax is about $2,700 a year after the credit (1% of $300,000, minus $300). Kentucky has no 1% cap, but cuts $49,100 off a 65+ homeowner’s assessed value. The full picture needs both bills, side by side, for the specific home.

For the details:

• How Indiana’s new property tax law changes Clark and Floyd County bills
• Kentucky’s $49,100 senior property tax exemption, explained

Kentucky vs. Indiana retirement taxes at a glance

For the full comparison, including insurance, healthcare and home prices, see Kentucky vs. Indiana retirement: which state is better? and the Kentucky side in detail: does Kentucky tax retirement income?

What about Louisville, Shepherdsville and Elizabethtown?

If you stay on the Kentucky side, the same Kentucky rules apply in Louisville, Shepherdsville and Elizabethtown. The difference between those areas is mostly property tax rates and home prices. See where retirees actually save money around Louisville.

If you still work part time in Louisville while living in Indiana, the tax picture changes again. See live in Indiana, work in Louisville: tolls and taxes.

Common mistakes retirees make with Indiana taxes

1. Assuming "no tax on Social Security" means no tax on retirement. Pensions and IRA withdrawals are fully taxable in Indiana.
2. Forgetting the county tax. It can add 1%–2% on top of the state rate.
3. Comparing income tax alone. Property tax, insurance and the home price can outweigh a few thousand dollars of income tax either way.
4. Moving mid-year without a plan. Your county tax is set by where you live on January 1, and part-year moves split state taxes between two returns.

Your next steps

1. Add up your income by type: Social Security, pensions, IRA/401(k), military, and any part-time wages.
2. Run both states’ math using the step-by-step table above, then confirm with your tax preparer.
3. Price the same home on both sides of the river, including property tax and insurance.
4. Check senior property tax benefits with the county (Indiana) or PVA (Kentucky) before you buy.

Frequently Asked Questions

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