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Tax Year 2026Updated July 13, 2026

Does Indiana Tax Tips in 2026?

Likely no - Indiana is expected to recognize the federal tips deduction, but official guidance is pending. Indiana's IRC conformity framework appears to capture the OBBBA (per RSM analysis), which would mean the federal tips deduction (IRC §224) reduces Indiana adjusted gross income. However, the Indiana Department of Revenue has not yet published deduction-specific guidance confirming this treatment. If confirmed, tipped workers would save 2.95% (state) plus their county income tax rate (0.5%-3.38%) on up to $25,000 in qualified tip income.

How Indiana's Tips Tax Treatment Works

Indiana's conformity to the OBBBA tips deduction depends on how its general IRC conformity framework incorporates the new provision. Here is what we know:

General IRC conformity: Indiana's income tax law generally conforms to the Internal Revenue Code. An analysis by RSM (a national accounting firm) indicates that Indiana's IRC-date-level conformity captures the OBBBA provisions. This means the tips deduction (IRC §224) should be part of Indiana's tax law - but "should" is not the same as "confirmed."

Pending DOR guidance: The Indiana Department of Revenue has not published a bulletin, information letter, or departmental notice specifically addressing the OBBBA tips, overtime, or senior bonus deductions. The post-AGI mechanics - particularly how the deduction interacts with Indiana's 92-county income tax system - need clarification. County taxes are computed on a base derived from Indiana AGI, and the flow-through treatment of the tips deduction to the county level is not explicitly documented.

What this means for workers: The most likely outcome is that Indiana will conform and the tips deduction will reduce both state and county income tax. But until the DOR confirms this, there is some uncertainty. Workers should monitor in.gov/dor for updates and consider consulting a tax professional for their specific situation.

Federal Tips Deduction Quick Reference

DetailValue
IRC Section§224 (OBBBA)
Maximum deduction$25,000 tips
Deduction typeAbove-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 datesJan 1, 2025 – Dec 31, 2028
Indiana treatmentPartial (own exclusion)

Worked Examples Comparing Federal and Indiana Treatment

Example 1: Restaurant server in Marion County (single filer, $40,000 income, $15,000 in tips)

Federal return:
Qualified tip income: $15,000
Tips deduction claimed: $15,000 (capped at $25,000)
Estimated federal tax savings: $1,800.00

Indiana return:
Indiana is expected to recognize the federal tips deduction based on IRC-date-level conformity, but official DOR guidance has not been issued. If conformity is confirmed, the $15,000 deduction would save approximately $442.50 in state tax (2.95%) plus $303 in Marion County tax (2.02%), for a combined state+county savings of roughly $745.50. Until DOR guidance is published, this savings is probable but not guaranteed.

Example 2: Bartender in Marion County (single filer, $70,000 income, $25,000 in tips - federal cap reached)

Federal return:
Qualified tip income: $25,000
Tips deduction claimed: $25,000 (capped at $25,000)
Estimated federal tax savings: $5,500.00

Indiana return:
If Indiana confirms conformity to the OBBBA tips deduction, the $25,000 deduction would save approximately $737.50 in state tax (2.95%) plus $505 in Marion County tax (2.02%), for a combined savings of roughly $1,242.50. Official DOR guidance is still pending as of August 2026.

Indiana's County Income Tax System Adds Complexity

Indiana is unique in that all 92 counties levy their own income taxes on residents, with rates ranging from 0.5% to 3.38%. These county taxes are significant - in some counties, the county rate exceeds the state rate of 2.95%. Key county rates include:

If conformity is confirmed, the tips deduction would save workers not just the 2.95% state rate but also their applicable county rate - potentially yielding combined savings of 3.45% to 6.33% on qualified tip income. This makes the pending DOR guidance particularly impactful for Indiana tipped workers.

Indiana's Declining Flat Rate

Indiana has been gradually reducing its flat income tax rate: from 3.23% (pre-2023) to 3.15% (2023), 3.05% (2024-2025), and now 2.95% for 2026. While this means the state-level savings from the tips deduction would be slightly smaller than in prior years, the overall tax burden on tip income is also lower. The county income tax, however, has not been subject to the same reduction trend.

Conformity Recheck Date - September 1, 2026

Our records indicate that Indiana's OBBBA conformity status should be rechecked on or after September 1, 2026. The DOR may issue guidance through an Information Bulletin, a departmental notice, or updated filing instructions for the 2026 IT-40 return. This page will be updated when official guidance is published.

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Frequently Asked Questions

Does Indiana conform to the federal 'no tax on tips' deduction under the OBBBA?
Likely yes, but not officially confirmed. Indiana's IRC conformity framework appears to capture the OBBBA based on IRC-date-level conformity (per an RSM analysis). However, the Indiana Department of Revenue has not published deduction-specific guidance confirming that the tips deduction (IRC §224) applies for Indiana income tax purposes. Workers should check the Indiana DOR website for updates.
Why is Indiana's conformity considered 'partial' rather than confirmed?
Indiana's tax code generally conforms to the IRC, which should include OBBBA provisions. However, the mechanics of how this specific above-the-line deduction interacts with Indiana's county income tax calculations have not been clarified. Indiana's DOR has not published a bulletin or guidance specifically addressing the tips, overtime, or senior bonus deductions from the OBBBA. Until that guidance is issued, conformity is probable but not guaranteed.
What Indiana income tax rate applies to my tip income?
Indiana imposes a flat 2.95% state income tax on all taxable income for tax year 2026 (reduced from 3.05% in 2025). In addition, all 92 Indiana counties levy their own income taxes, ranging from 0.5% to 3.38%. Your county rate depends on your county of residence. If the tips deduction is not recognized, the combined state-plus-county rate on tip income ranges from approximately 3.45% to 6.33%.
How do Indiana county income taxes interact with the tips deduction?
Indiana's county income taxes are computed on a base that starts from Indiana adjusted gross income. If the OBBBA tips deduction reduces federal AGI (and flows through to Indiana AGI), it would also reduce the base for county income tax - providing savings at both the state and county level. However, the DOR has not confirmed how the deduction interacts with the county tax computation. This is one of the key questions pending in DOR guidance.
When will Indiana issue guidance on OBBBA conformity?
The Indiana DOR has not announced a timeline for issuing guidance specific to the OBBBA tips, overtime, or senior bonus deductions. The conformity data in our records suggests a recheck date of September 1, 2026. Workers and tax preparers should monitor the Indiana DOR website (in.gov/dor) for updates, including any Information Bulletins or departmental notices.
Should I file my Indiana return assuming the tips deduction applies?
This is a decision to make with your tax preparer. If Indiana's general IRC conformity captures the OBBBA (as RSM's analysis suggests), claiming the deduction on your Indiana return would be consistent with the law. However, without explicit DOR guidance, there is some risk of the position being challenged. Consult a tax professional familiar with Indiana conformity rules for personalized advice.