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)
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)
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