And you thought federal income taxes were confusing…

The State of Indiana tax laws closely follow the Federal laws, at least for the most part.  When you prepare your state income tax return, the first number you use is your federal adjusted gross income.  For many years it was a pretty simple calculation from there.  Over the past few years, the State has stopped following the federal law with regards to many deductions.  This requires you to add back to the federal income some things you got to deduct.


To make things even more complicated, the 2011 Indiana General Assembly did not conform to several of the tax provisions that were included in federal income as of January 1, 2011.  These created a long list of add back items.


It gets worse…the add backs are retroactive to the tax year 2010.  This means you were suppose to file an amended 2010 state income tax return to change the taxable income reported (and pay more tax) for the add backs.  Of course no one told anyone about this so very few amended returns were filed.  The State of Indiana has created a policy that will allow you to put the add backs from 2010 on your 2011 tax return.  You will need to get a copy of the instructions from the state to do this because there are special codes you will need to use.


So what are these “add backs”?


There are numerous add backs but I’ll list the most common ones that you should be aware of:


  • IRA charitable distributions  (affects older taxpayers)


  • Tuition and fees          (affects students and parents)


  • Educator expense   (affects teachers)


  • Employer-provided educational expense   (affects employees with educational benefits)


  • Qualified transportation fringe   (affects certain employees)


  • Student loan interest   (affects those with student loans)


If you deducted any of these items on your federal income tax return, you need to add the deduction back to your State of Indiana taxable income.  Don’t forget this is retroactive to 2010, so you need to look at last year’s tax return as well as your 2011 tax return.  Best to consult with your tax advisor on how much you need to add back on any of these items


Other State of Indiana tax oddities…


Affective December 31, 2011 you can no longer carry back a net operating loss, even though you can carry it back 2 years on your Federal income tax return.


If you claim the federal bonus depreciation (which is automatic unless you opt out of it) the State of Indiana does not allow the amount over normal depreciation and you will have an add back.  The work around for this is to opt out and claim the expense election under section 179, since the State of Indiana will recognize it.


Affective June 30, 2011, if you hire an unauthorized alien then you cannot deduct the cost of the wages paid to that person.  Those wages must be added back on the State of Indiana tax return.


If your principal residence is foreclosed on during the year 2011 or 2012, the debt you are forgiven is not taxable on your federal income tax return.  The State of Indiana does not follow this rule and the amount of the mortgage that the bank did not collect will become taxable to the state.


There are some deductions the State of Indiana gives you that the IRS does not…


Private school/home school deduction.  If you qualify you are entitled to a $1,000 deduction for each child for the cost of the schooling or supplies.


College Savings Plans, also known as a 529 plan.  You can receive a 20% credit for contributions of up to $5,000 in these plans.  Note, this is a credit not a deduction, which means it directly reduced your taxes.


Renter’s deduction.  You can deduct up to $3,000 of the rent you pay. 


Real Estate tax deduction.  You can deduct up to $2,500 of real estate taxes you pay.


Contributions to colleges and universities within the State of Indiana.  There is a small credit available if you make a contribution to one of the institutions of higher learning.


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5 Responses to And you thought federal income taxes were confusing…

  1. Thanks for the post, but why would Indiana essentially penalize a student for trying to get ahead in life by educating themselves when in the past the Tuition & Fees were a deduction and a positive reward for the student? It doesn’t make any sense to me.

    Also, In the city of Hammond, you get free tuition if you live there. This was to help “improve” the city. But, Indiana the state does the opposite. P

  2. pswcpa says:

    That’s a great question. But the only one who can answer it is your local state senator or represenative in the House. They should be back in town since the 2012 session just ended. This being an election year, it is the perfect time to approach your representatives about their views on this and other issues.

  3. Never tried talking directly to the source, as politically filtered as it may be. Wouldn’t you just say that the tax law changes for the add-backs basically comes down to making more money for the state of Indiana?

    It’s wrong to charge teachers & students retroactively for their teacher’s and student expenses. It’s not like teachers and students are laughing to the bank anytime soon. I thought I read the Gov Mitch Daniels has a lot to do with this tax law change for 2011, is that correct?

  4. Russ Hale says:

    The Sec 179 deduction for federal taxes in excess of $25000 is added back for Indiana taxes. The question is is this add back now depreciable for Indiana purposes or is just lost.

    • pswcpa says:

      The amount of the disallowed section 179 deduction does become depreciable and acts as an additional deduction on the State return in future years. You will need to keep a seperate depreciation schedule for the Federal law and the State law.

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