in-20250625-IR-045250318NRA: DEPARTMENT OF REVENUE

DEPARTMENT OF REVENUE Information Bulletin #27 Income Tax June 2025 Effective Date: January 1, 2025 Replaces Bulletin #27, dated December 2023 SUBJECT: Indiana Adjusted Gross Income Tax Applicable to Military Personnel and Spouses REFERENCES: IC 6-3-1-2.5; IC 6-3-1-2.7; IC 6-3-1-3.5; IC 6-3-1-34; IC 6-3-2-4; IC 6-8.1-9-1; 50 U.S.C. § 4001; Army Regulation 525-93 (Dec. 20, 2012); Joint Publication 4-05 (Oct. 23, 2018). DISCLAIMER: Information bulletins are intended to provide nontechnical assistance to the general public. Every attempt is made to provide information that is consistent with the appropriate statutes, rules, and court decisions. Any information that is not consistent with the law, regulations, or court decisions is not binding on either the Department or the taxpayer. Therefore, the information provided herein should serve only as a foundation for further investigation and study of the current law and procedures related to the subject matter covered herein. SUMMARY OF CHANGES Apart from technical, nonsubstantive changes, this bulletin has been revised to include information related to 2025 legislation that amended the deductions listed within this bulletin to include the United States Space Force, the United States Public Health Service Commissioned Corps, and the National Oceanic and Atmospheric Administration Commissioned Officer Corps as of January 1, 2025. INTRODUCTION The purpose of this bulletin is to provide guidance concerning the application of Indiana individual income tax to personnel of the U.S. military, including filing requirements, estimating tax, and any applicable deductions and credits. Throughout this document, military salary will be referred to as “wages.” In this context, “wages” include any form of compensation for military service. The term does not include retirement or disability income from military service. TAX TREATMENT OF MILITARY PERSONNEL INCOME Regular Members of the Armed Forces For 2023 and earlier, Indiana adjusted gross income tax applies to members of the active component of armed forces of the U.S. Indiana resident regular members of the armed forces are subject to tax on all income, regardless of source. For 2024 and later, Indiana resident regular members of an active component of the armed forces are exempt from income tax on their wages derived from their service in the armed forces. However, Indiana resident regular members of an active component of the armed forces are subject to tax on all other income, regardless of source. Nonresident regular members of the armed forces are subject to tax on all non-military income received from Indiana sources. RESERVE COMPONENTS AND NATIONAL GUARD For 2022 and earlier, a member of a reserve component of the armed forces or a member of the National Guard is allowed a deduction from adjusted gross income for wages earned as a result of service on involuntary orders or when the person is mobilized and deployed for full-time service, or during the period for which the member’s National Guard unit is federalized. For 2023 and later, a member of a reserve component of the armed forces or a member of the National Guard is allowed a deduction from adjusted gross income for wages earned as a result of the member’s military service, including National Guard state active duty, regardless of mobilization, deployment, or federalization of the member’s National Guard unit. This includes wages earned as a military technician (dual status). Some examples of income not exempt from taxation include: Spouses of Military Personnel Indiana adjusted gross income tax applies to all income of a domiciled spouse of an armed forces member, regardless of source. However, pursuant to 50 U.S.C. § 4001(c), Indiana adjusted gross income tax does not apply to the earned income of a non-domiciled spouse of an armed forces member. Nevertheless, if the spouse elects to be treated as an Indiana resident under 50 U.S.C. § 4001(a)(2)(B), the spouse will be subject to Indiana income tax on the spouse’s income. RESIDENCY Military personnel who enter the armed forces as Indiana residents remain legal residents of Indiana regardless of duty station until official action is taken to change their legal residence. This can be accomplished by filing a State of Legal Residence Certificate, Form DD 2058, with the military personnel office. The spouse of an armed forces member who moves to Indiana, establishes a new residence, and lives here typically becomes a resident or domiciliary of Indiana. However, pursuant to the Military Spouse Residency Relief Act, the spouse of an armed forces member may choose to keep a previous domicile if the service member and spouse had the same domicile or residence prior to moving to Indiana under 50 U.S.C. § 4001(a)(2)(A). Further, for 2018 and later, a spouse of a service member may elect to use the same residence as the service member for tax purposes pursuant to 50 U.S.C. § 4001(a)(2)(B). The spouse of an armed forces member is exempt from Indiana income taxation on Indiana-source earned income when: FILING REQUIREMENTS Resident military personnel are required to file an Indiana income tax return if their gross income exceeds their exemptions. Income from all sources, both military and non-military (excluding military combat zone compensation), should be reported on the Indiana resident return, Form IT-40, even if the income is deducted in full for Indiana tax purposes. Nonresident military personnel are required to file an Indiana income tax return if they receive any income from an Indiana source. Military earnings for active duty are not considered to be from an Indiana source; however, compensation for other employment would be attributable to Indiana. Nonresident service members should file an Indiana part-year or nonresident return, Form IT-40PNR, to report their other compensation. Military personnel may be subject to tax by both their state of legal residence and the state in which they are stationed if they have non-military earnings. Persons with income subject to tax by two states are allowed a credit in one state for tax paid to the other state. Income Tax Information Bulletin #28 provides additional information for taxpayers with income subject to tax by two states, which is available at in.gov/dor/resources/tax-library/information-bulletins/income-tax-information-bulletins/. An eligible spouse of a non-Indiana-domiciled armed forces member should file an Indiana part-year or nonresident return, Form IT-40PNR, to claim a deduction of all Indiana-source earned income. Schedule IN-2058SP and the armed forces member’s W-2 must be enclosed with the filing. DEDUCTIONS AVAILABLE TO INDIANA RESIDENTS FOR MILITARY SERVICE Military Service Deduction For years before 2022, military personnel on active duty or in the active reserves may deduct up to $5,000 of their military pay if it was not already excluded or deducted from their adjusted gross income. If the service member earned less than $5,000 military pay, he or she may deduct only the amount of military pay earned under this deduction. If the taxpayer and spouse are both in the military, they each may claim the deduction. For 2023, this deduction is available only for members of the active components of the armed forces. As of January 1, 2025, this includes the United States Space Force, the United States Public Health Service Commissioned Corps, and the National Oceanic and Atmospheric Administration Commissioned Officer Corps. Members of the reserve components and National Guard will claim a full deduction; see the “National Guard and Reserve Components Members Deduction” below. The service member claims the deduction on IT-40 Schedule 2, line 7 (or Form IT-40PNR Schedule C, line 7). Military retirement pay received by an Indiana resident is deductible in full for Indiana tax purposes. As of January 1, 2025, this includes military retirement pay from the United States Space Force, the United States Public Health Service Commissioned Corps, and the National Oceanic and Atmospheric Administration Commissioned Officer Corps. This deduction is available for the military member and the miliary member’s surviving spouse. However, if a divorced spouse receives a portion of a service member’s military retirement pay as a result of a divorce decree or similar agreement, that portion of the pay is not deductible for the spouse. The individual need not have been an Indiana resident during active military service to qualify for this adjustment. Military withholding statements or retirement survivor’s benefits statements must be enclosed with the tax return when these deductions are claimed. National Guard and Reserve Component Members Deduction Service members eligible to claim the National Guard and Reserve Component deduction include members of the Indiana Army National Guard; Indiana Air National Guard; and members of the reserve components of the Air Force, Army, Coast Guard, Marine Corps, Merchant Marine, Space Force (as of January 1, 2025), and Navy, as well as United States Public Health Service Commissioned Corps and the National Oceanic and Atmospheric Administration Commissioned Officer Corps (as of January 1, 2025). For 2022 and earlier, in calculating Indiana adjusted gross income, these service members may claim the deduction for any combination of periods when they were: These service members are entitled to deduct the amount of their qualified military income that was not excluded from their gross income for federal income tax purposes under Section 112 of the Internal Revenue Code. Military withholding statements must be enclosed with the tax return when claiming this deduction. For 2023 and later, this deduction is extended to all wages received for service as a member of the reserve component or National Guard. However, the wages must be from service in the reserve component or National Guard. Wages from other sources (e.g., a job with a private-sector employer) is not deductible. For 2022 and earlier, “qualified military income” means wages that are paid to a member of the National Guard for any combination of periods when the member is on full-time involuntary orders; the member has been mobilized and deployed, either voluntarily or involuntarily, for full-time service; or the member’s unit has been federalized. For 2022 and earlier, “qualified military income” also means wages that are paid to members of a reserve component of the armed forces of the U. S. for any combination of periods when the member is on full-time involuntary orders or the member has been mobilized and deployed, either voluntarily or involuntarily, for full-time service. “Deployment” is defined in Army Regulation 525-93 (Dec. 20, 2012) as “[t]he relocation of forces and [material] to desired operational areas. Deployment encompasses all activities from origin or home station through destination, specifically including intra-continental U.S., inter-theater, and intra-theater movement legs, staging, and holding areas.” “Mobilization” is defined in Joint Publication 4-05 (Oct. 23, 2018), which provides in pertinent part: Service members serving on full-time orders in an Active Guard and Reserve Program (AGR) are not considered mobilized for purposes of claiming their income as “Qualified Military Income” under IC 6-3-1-34. Limitations For 2022 and earlier, an individual is not entitled to both a Military Service Deduction under IC 6-3-2-4 and a deduction for members of the National Guard and reserve components of the armed forces of the U.S. for the same qualified military income. In short, one or the other, but not both of the deductions may be claimed for the same qualified military income in the same taxable year. For 2023 and later, National Guard and reserve component members may not claim the Military Service Deduction under IC 6-3-2-4 on their wages received for service in the National Guard or reserve component. Additionally, military income received due to service in a combat zone is not subject to tax on an individual’s federal or state income tax return. Because this income is already excluded from Indiana income tax, it is not eligible for the deduction available to members of the National Guard and reserve components of the armed forces of the U.S. Nonresident Military Spouse Earned Income Deduction The non-domiciliary spouse of an armed forces member may, under defined circumstances, claim the Indiana Nonresident Military Spouse Earned Income Deduction equal to the amount of his/her Indiana earned income. For purposes of the deduction, “earned income” is defined in uniformity with the IRC Section 62 definition of earned income, which includes “wages, salaries, tips, and other employee compensation, plus the amount of taxpayer’s net earnings from self-employment income (federal Schedule C income).” The spouse claims the deduction on IT-40PNR, Schedule C, line 11. A copy of Schedule IN-2058SP must be included with the return as well. LOCAL INCOME TAXES All Indiana counties have adopted a local income tax. The tax is imposed on residents of adopting counties and out-of-state residents who have a principal place of business or employment in an adopting county. A list of the adopting counties and their rates is provided in the individual income tax booklets, IT-40 and IT-40PNR. Resident military personnel are subject to a local income tax if they reside in Indiana as of Jan. 1 of the tax year. However, a resident military person who maintains a household outside the state of Indiana is not subject to a local income tax. The income of a spouse of an armed forces member is not subject to local income tax, provided that the non-domiciled spouse qualifies for the Nonresident Military Spouse Earned Income Deduction. If the spouse does not qualify for the deduction and resides in Indiana as of Jan. 1 of the tax year, his or her Indiana earned income is subject to local income tax. ESTIMATED TAX A military person who expects to owe $1,000 or more in state and/or county income tax may be required to make estimated installment payments. Generally, the military will withhold  state income tax from military earnings of resident military personnel in an amount sufficient to avoid estimated tax payments on military earnings. However, local income tax is not withheld. Other types of income not subject to withholding of tax could result in an amount due of $1,000 or more of state and/or local income tax due for the year. Taxpayers may be subject to a penalty for underpayment of estimated tax if they do not make the required estimated payments. For further information concerning estimated tax, refer to Income Tax Information Bulletin #3, available at in.gov/dor/resources/tax-library/information-bulletins/income-tax-information-bulletins/. DUE DATES AND EXTENSION OF TIME FOR FILING Indiana individual income tax returns are due on or before April 15 of the year following the tax year. Military personnel on active duty outside of the U.S. and Puerto Rico will be allowed an automatic 60-day extension. A statement must be enclosed with the return verifying that the taxpayer was outside the U.S. or Puerto Rico on April 15. Military personnel serving in a combat zone have an automatic extension of 180 days after they leave the combat zone. If they are hospitalized outside the U.S. as a result of such service, the 180-day extension period begins upon release from the hospital. The spouse of such a service member must use the same method of filing for both federal and Indiana income tax returns. If filing under this extension, write “Combat Zone” across the top of the form before submitting it to the Department for processing. COLLECTION OF OUTSTANDING TAX DEBTS The federal Servicemembers Civil Relief Act (federal SCRA) and Indiana Servicemembers Civil Relief Act (Indiana SCRA) allow the Department to assist active duty military members with the penalty, interest and, if materially affected, the collection activity for outstanding tax debts. To qualify for this relief, the military member must be one of the following: The federal and Indiana SCRA provide different provisions to those service members that are materially affected and those that are not materially affected. The Department will consider all relevant facts and circumstances in determining whether a service member’s ability to pay is materially or not materially affected by their active duty status. More information is available at in.gov/dor/individual-income-taxes/information-for-military-service-members/. You can also contact the Taxpayer Advocate Office at 317-232-4692 for more on the federal SCRA and Indiana SCRA. If you have any other questions concerning this bulletin, contact the Tax Policy Division at taxpolicy@dor.in.gov. _________________________