Indiana's Income Tax Bill 2025: Key Changes and Economic Impact

Indiana's 2025 legislative session brought significant modifications to the state's income tax structure along with property and sales tax reforms, collectively designed to provide tax relief and stimulate economic development.

On May 6, 2025, Governor Mike Braun signed into law an omnibus tax bill (L. 2025, H1427) that notably expands income tax credits and restructures tax rates. A key income tax change includes the expansion of the physician practice ownership tax credit. Previously limited to primary care providers, this credit now applies to all practicing physicians with eligible ownership stakes, effective retroactively from January 1, 2025. Additionally, the bill allows pass-through entities to claim tax credits for taxes withheld or paid on their behalf, streamlining the tax process for such entities.

Another pivotal development is the conditional reduction of the state's individual adjusted gross income tax rate, set to begin in tax year 2030. This reduction, introduced under legislation S451 effective July 1, 2025, is contingent upon state revenue growth thresholds determined biennially from 2028 through 2043. If state general fund revenues increase by specified margins over four consecutive fiscal years ending June 30, 2028, the income tax rate will be gradually decreased by 0.05 percentage points every two years, starting in 2030. The current 2.9% tax rate has an expiration set before January 1, 2030, initiating this phased reduction path.

Complementing these income tax changes, the 2025 session also enacted sweeping property tax relief measures. The exemption threshold for business personal property taxes remains at $80,000 for 2025 but will rise sharply to $2 million beginning with the 2026 assessment year. The session further removes the 30% depreciation floor on personal property, providing additional relief to businesses. These property tax reforms align with Governor Braun's campaign promises to ease tax burdens on homeowners and small businesses.

Additional legislative highlights include new tax amnesty program requirements directing the Indiana Department of Revenue to facilitate taxpayer compliance and reforms to ease complexities in the pass-through entity tax (PTET) system, aimed at better managing state and local tax (SALT) credit utilization.

Overall, Indiana's Income Tax Bill 2025 and accompanying tax legislation mark a significant shift toward lowering individual income tax rates in the long term, while offering immediate credits and exemptions to targeted groups such as physicians and small businesses. The conditional nature of the income tax rate reduction underscores a fiscal approach that balances tax relief with sustainable revenue growth, reflecting measured optimism about Indiana's economic future.

These legislative changes, signed into law between April and June 2025, position Indiana to enhance its tax competitiveness and foster economic development in the years ahead.