Our comprehensive guide to taxes on retirement income, property and purchases, as well as special tax breaks for seniors, in every state. Go to Retiree Tax Map Indiana View State Compare List (0) selected | Compare up to 5 The Bottom Line Not Tax-Friendly The Hoosier State offers a few special tax breaks to retirees. It exempts Social Security benefits, and it offers limited exemptions for military pensions and federal civil-service pensions. Its state income tax is a flat rate of 3.3%, which will be reduced to 3.23% by 2017, but many counties in Indiana also impose their own income taxes. The state sales tax is high. State Sales Tax 7% (food and prescription drugs are exempt). Income Tax Range The state has a flat rate of 3.3% of federal adjusted gross income in tax year 2015 and 2016. The rate will be reduced to 3.23% in 2017.Counties also have the authority to impose an income tax, instead of raising property taxes. Currently, all 92 counties have enacted a local option income tax. Social Security Benefits are not taxed. Exemptions for Other Retirement Income Railroad retirement benefits are exempt. Taxpayers 60 and older may exclude as much as $5,000 from military pensions. Taxpayers age 62 and older may deduct from their adjusted gross income $2,000 from a federal civil-service annuity. Out-of-state pensions are fully taxed.IRAsTaxable at ordinary income tax rates.401(k)s and Other Defined-Contribution Employer Retirement PlansTaxable at ordinary income tax rates.Private PensionsTaxable at ordinary income tax rates.Public PensionsTaxpayers 60 and older may exclude as much as $5,000 from military pensions. Taxpayers age 62 and older may deduct from their adjusted gross income $2,000 from a federal civil-service annuity. Out-of-state pensions are fully taxed. Property Taxes Homeowners can deduct up to $2,500 from their income taxes for property taxes paid on their residence.Homeowners are eligible for the standard homestead deduction, which is $45,000 or 60% of the assessed value of the homestead, whichever is less. A taxpayer entitled to receive a standard homestead deduction is also entitled to a supplemental deduction — 35% for a homestead with an assessed value of less than $600,000, or 25% for a homestead assessed at more than $600,000.Median property tax on Indiana's median home value of $122,200 is $1,057, according to the Tax Foundation.Tax breaks for seniors: Homeowners 65 and older who earn $25,000 or less (combined for a married couple) are eligible to receive a tax reduction on property with an assessed value of $182,430 or less. A surviving spouse is entitled to the deduction if he or she is at least 60 years old and the deceased was at least 65 at the time of death. The amount of the deduction is the lesser of one-half of the assessed value of the property or $12,480. Veterans 62 or older with a disability of at least 10% may qualify for a similar deduction. Inheritance andEstate Taxes Indiana has no estate or inheritance tax.