Indiana Adopts New Local Income Tax Structure
July 28, 2016
Indiana has adopted legislation repealing existing categories of county income taxes (including the County Adjusted Gross Income Tax (“CAGIT”), the County Option Income Tax (“COIT”) and the County Economic Development Income Tax (“EDIT” or “CEDIT”)) and replacing them with a new, more unified county income tax structure with three rate components of a Local Income Tax.
The existing local taxes are repealed effective 1 January 2017, and the taxes in effect on 1 May 2016, will be consolidated into the new law. As part of the transition to the new structure, a municipality may not adopt any ordinances under the former taxes after 30 June 2016.
There are three rate components of the reorganized local income tax: (1) expenditure rate, (2) property tax relief rate, and (3) special purpose rate. The revenue collected from a rate component may be used only for the purpose established in the statute. Each rate component serves a function similar to an existing local option income tax.
The expenditure rate component may be used for school corporations and civil taxing units, certified shares, public safety, and economic development, and the rate is set at a maximum 2.5% of adjusted gross income (except for Marion County, the rate for which is 2.75%). The property tax relief component is used to fund a property tax credit to reduce property tax liabilities, and the rate is set at a maximum 1.25% of adjusted gross income. Finally, the special purpose rate component is a distinct rate implemented for a specific purpose by a particular county and the rate can vary. Excluding the special purpose rate, the maximum local income tax rate is 3.75% of adjusted gross income for all counties (except Marion County, which has a maximum rate of 4%).