Indiana cut property tax deductions for homeowners starting in 2025, phasing out a flat $48,000 homestead deduction in favor of a larger supplemental deduction that shields a growing share of a home's assessed value over time. That relief for homeowners means less revenue for the local governments and school districts that depend on property taxes — and the state's answer has been to give cities and counties more room to raise local income taxes instead.
The New Local Income Tax Tools
Counties currently have the option to adopt a "Property Tax Relief" local income tax rate of up to 0.3%, specifically earmarked to offset homestead property tax relief — but that option is only available for 2026 and 2027 under current law. A bigger structural overhaul is layered on top: legislation signed into law creates a new municipal local income tax of up to 1.2%, within an overall county-level cap of 2.9% combined across all local income tax rates.
The Timeline Keeps Moving
The bigger overhaul was originally set to take effect in 2028, then got pushed to 2029 under a follow-up bill. Existing countywide local income tax rates are set to expire after 2027 under current law, which is part of why the legislature keeps revisiting the timeline — counties and cities need to know what rate structure they'll actually be working with before they can plan multi-year budgets. A joint state-local task force has been set up to negotiate how income tax revenue gets split between counties and the municipalities inside them, with recommendations due to state lawmakers by December 1.
What This Means for Your Tax Bill
If you own a home in Indiana, the property tax side of this has already been moving in your favor since 2025's deduction changes. The tradeoff shows up somewhere else: if your county or city adopts one of these new local income tax options, more of what you owe local government shifts from your property tax bill to your state income tax withholding. It's the same total pie split differently — worth watching if you're budgeting for the next few years, since the exact rates and split are still being negotiated county by county rather than locked in statewide.