Indiana Local Income Tax Reform Effective Soon
Author: Rena Pirsos, XpertHR Legal Editor
September 13, 2016
The Indiana Department of Revenue has issued guidance regarding changes in the nonresident local income tax rate and the structure of the local income tax rates in general.
Indiana currently has three county income taxes:
- County Adjusted Gross Income Tax (CAGIT);
- County Option Income Tax (COIT); and
- County Economic Development Income Tax (CEDIT).
Counties can elect either CAGIT or COIT. If a county does not elect one of those two, it can elect only CEDIT, which is actually an increase in the CAGIT and COIT rates.
Reform legislation was enacted in 2015 that will transition taxpayers to a single Local Income Tax (LIT). The guidance explains that, in addition, the current county income tax rates imposed on nonresidents will be the same as the rate for residents. Both of these changes take effect January 1, 2017.
The guidance also clarifies that the new LIT will not affect the resident tax rates in effect on May 1, 2016. Those rates will continue to be in effect on January 1, 2017, unless a county acts to change its county income tax rates between July 1, 2016, and October 31, 2016.
The law in Indiana defines a local taxpayer as:
- An individual who resides in a county on January 1 of the tax year (resident taxpayer); or
- An individual who does not reside in a county that has imposed a local income tax on January 1 of the tax year, but whose principal place of business or employment is in a county that has imposed a local income tax (nonresident taxpayer).
This definition will not change - taxes will still be imposed on residents and nonresidents, but there will only be one LIT rate for both taxpayer types. In effect, if a taxpayer is subject to local income tax in a county, an employer must withhold the tax at the same rate for all individuals subject to that county's tax rate.
However, county rates will differ because each county will be free to set its own tax rate. But, within each county, only one rate will apply to both residents and nonresidents.
The Indiana Department of Revenue (DOR) will publish one local income tax rate, applicable to both residents and nonresidents, in Departmental Notice No.1, effective January 1, 2017, and in its tax return instructions for tax years beginning in 2017. Any changes to local income tax rates will be published in that same Notice twice a year (effective January 1 and October 1). The DOR notes that, other than listing one rate as opposed to two, there will be no other changes in dates of the publication or in its location on DOR's website.