Tax Year 2026Updated July 13, 2026

Does Indiana Tax Overtime in 2026?

No - Indiana does not tax qualifying overtime premium pay for tax year 2026. Indiana DOR confirmed conformity via Income Tax Information Bulletin #128. The federal overtime deduction (IRC §225) reduces Indiana adjusted gross income. Workers save 2.95% (state) plus their county income tax rate (0.5%-3.38%) on up to $12,500 ($25,000 MFJ) in qualifying overtime premium pay. Phase-outs apply at $150,000 MAGI (single) / $300,000 (joint). Note: the deduction applies for tax year 2026 only.

How Indiana's Overtime Tax Treatment Works

Indiana's conformity to the OBBBA overtime deduction is confirmed by the Indiana Department of Revenue.

Income Tax Information Bulletin #128: The Indiana DOR confirmed conformity via Information Bulletin #128. Overtime deductions apply for tax year 2026 only, capped at federal limits. The deduction reduces Indiana adjusted gross income.

Phase-out rules: The deduction phases out at $150,000 MAGI for single filers and $300,000 MAGI for joint filers, consistent with the federal limits established under IRC §225.

County income tax interaction: Because the overtime deduction reduces Indiana AGI - which is the starting point for county income tax calculations - the deduction provides savings at both the state (2.95%) and county (0.5%-3.38%) levels. In Marion County (Indianapolis), a worker at the $12,500 single-filer cap saves $368.75 in state tax plus approximately $252.50 in county tax, for combined savings of $621.25.

Federal Overtime Deduction Quick Reference

Detail	Value
IRC Section	§225 (OBBBA)
Maximum deduction	$12,500 overtime ($25,000 MFJ)
Deduction type	Above-the-line (Schedule 1-A)
FICA still applies?	Yes (Social Security 6.2% + Medicare 1.45%)
MFS eligible?	No (MFJ or Single/HoH only)
Effective dates	Jan 1, 2025 – Dec 31, 2028
Indiana treatment	Conforms
What qualifies?	Overtime premium only (the 0.5x above regular rate), FLSA non-exempt employees

Worked Examples Comparing Federal and Indiana Treatment

Example 1: Factory worker in Marion County (single filer, $50,000 income, $8,000 overtime premium)

Federal return:
Qualifying overtime premium: $8,000
Overtime deduction claimed: $8,000 (capped at $12,500)
Estimated federal tax savings: $960.00

Indiana return:
Indiana DOR confirmed conformity via Income Tax Information Bulletin #128. Overtime deductions apply for tax year 2026 only, capped at federal limits. Phase-outs: $150,000 MAGI (single) / $300,000 (joint). The $8,000 deduction saves approximately $236 in state tax (2.95%) plus $161.60 in Marion County tax (2.02%), for a combined state+county savings of roughly $397.60.

Example 2: Nurse in Marion County (single filer, $75,000 income, $12,500 overtime premium - federal cap reached)

Federal return:
Qualifying overtime premium: $12,500
Overtime deduction claimed: $12,500 (capped at $12,500)
Estimated federal tax savings: $2,750.00

Indiana return:
Indiana DOR confirmed conformity via Income Tax Information Bulletin #128. Overtime deductions apply for tax year 2026 only, capped at federal limits. Phase-outs: $150,000 MAGI (single) / $300,000 (joint). The $12,500 deduction saves approximately $368.75 in state tax (2.95%) plus $252.50 in Marion County tax (2.02%), for a combined savings of roughly $621.25.

Indiana's 92 Counties Add Significant Tax Variation

Indiana's county income tax system creates wide variation in the total tax savings from the overtime deduction. Key county rates include:

Marion County (Indianapolis): approximately 2.02% - combined state+county rate of 4.97%
Lake County: approximately 1.50% - combined rate of 4.45%
Allen County (Fort Wayne): approximately 1.48% - combined rate of 4.43%
Hamilton County: approximately 1.00% - combined rate of 3.95%
St. Joseph County (South Bend): approximately 1.75% - combined rate of 4.70%

Workers in high-county-rate areas see the largest combined savings, because the confirmed deduction reduces both the state and county tax base.

Indiana's Manufacturing and Logistics Workforce

Indiana has a large manufacturing and logistics sector where overtime is common. The state's flat 2.95% rate is among the lower state income tax rates nationally, but county taxes can add substantially. For a factory worker in a county with a 2% rate, the confirmed overtime deduction reduces a combined 4.95% burden - a meaningful benefit for Indiana's industrial workforce.

Conformity Confirmed for Tax Year 2026 Only

Indiana DOR confirmed conformity via Income Tax Information Bulletin #128. The overtime deduction applies for tax year 2026 only, capped at federal limits, with phase-outs at $150,000 MAGI (single) / $300,000 (joint). Workers and tax preparers can monitor in.gov/dor for any subsequent updates or extensions to future tax years.

Related Tools

No Tax on Overtime Calculator - calculate your federal overtime deduction
Indiana Tax Guide - full state tax overview
Indiana Paycheck Calculator
Does Indiana Tax Tips?
W-2 Code TP: Tips Reporting Guide
W-2 Code TT: Overtime Reporting Guide
All 51 States: Tips & Overtime Tax Map

Frequently Asked Questions

Does Indiana conform to the federal OBBBA overtime deduction?

Yes. Indiana DOR confirmed conformity via Income Tax Information Bulletin #128. Overtime deductions apply for tax year 2026 only, capped at federal limits. Phase-outs: $150,000 MAGI (single) / $300,000 (joint). The federal overtime deduction (IRC §225) reduces Indiana adjusted gross income.

What Indiana tax rates apply to overtime pay?

Indiana imposes a flat 2.95% state income tax on all taxable income for tax year 2026. In addition, all 92 Indiana counties levy their own income taxes, ranging from 0.5% to 3.38%. With the OBBBA overtime deduction confirmed for TY2026, qualifying overtime premium pay is deducted from Indiana AGI, reducing your combined state-plus-county rate (3.45% to 6.33% depending on your county) on that deducted amount.

Would the overtime deduction reduce my Indiana county taxes too?

Yes. Income Tax Information Bulletin #128 confirms that the OBBBA overtime deduction reduces Indiana adjusted gross income, which flows through to reduce county income tax as well - providing savings at both the state (2.95%) and county (0.5%-3.38%) levels.

When will Indiana issue guidance on OBBBA overtime conformity?

Indiana has confirmed conformity via Income Tax Information Bulletin #128. Workers and tax preparers can monitor the Indiana DOR website (in.gov/dor) for any further updates or additional bulletins.

How does Indiana's flat tax affect overtime workers compared to graduated-rate states?

Indiana's flat 2.95% rate means the state tax savings from the overtime deduction is the same regardless of total income: 2.95% of the deduction amount. In graduated-rate states, higher earners save more per dollar of deduction. Indiana's county taxes (which vary from 0.5% to 3.38%) add a second layer that can make the total combined savings on overtime comparable to some graduated-rate states.

Should I file my Indiana return assuming the overtime deduction applies?

Yes, you may claim the overtime deduction on your Indiana return for tax year 2026. Indiana DOR confirmed conformity via Income Tax Information Bulletin #128. The deduction applies for tax year 2026 only and is subject to the $150,000 MAGI (single) / $300,000 (joint) phase-outs. Consult a tax professional familiar with Indiana conformity rules for personalized advice.