The Indiana General Assembly made a significant — and time-limited — move in 2026: it enacted three brand-new deductions that exist only for the 2026 tax year. Under IC 6-3-2-31, IC 6-3-2-32, and IC 6-3-2-33, Indiana taxpayers can now deduct qualified tips, qualified overtime compensation, and qualified passenger vehicle loan interest when calculating their Indiana adjusted gross income (AGI). These deductions don't carry forward to 2027. They don't exist in 2025. Miss 2026, and they're gone.
The Indiana Department of Revenue formalized the rules in Income Tax Information Bulletin #128, published June 2026. This post translates that bulletin into plain English for small-business owners and employees across NE Indiana. If you want to work through the numbers for your specific situation, reach out to our team at Warrior — we're helping Fort Wayne-area clients capture these deductions right now.
What Are Indiana's Three New 2026-Only Deductions?
Indiana created three separate deductions available exclusively for the 2026 tax year: one for qualified tips, one for qualified overtime compensation, and one for interest paid on loans for passenger vehicles. Each deduction starts with the amount already allowed as a federal deduction and cannot exceed that federal figure — so your federal return sets the ceiling, and Indiana lets you take the same deduction at the state level.
Here's the key mechanic: the federal government created these deductions through IRC §§ 224, 225, and 163(h)(4)(B). Indiana is essentially mirroring those federal deductions on your state return for one year only. The deductions reduce your Indiana AGI — which in turn reduces your Indiana state income tax and, in many cases, your county income tax as well.
How Does the Indiana Tips Deduction Work in 2026?
Indiana's tips deduction under IC 6-3-2-31 follows the federal deduction for qualified tips reported on line 13 of federal Schedule 1-A (Form 1040), including any federal income phaseouts and married-filing-separately disallowances. Your Indiana deduction cannot exceed your federal deduction — so if the federal phaseout limits you to $25,000, Indiana's deduction is capped at $25,000 as well.
For full-year Indiana residents, the math is straightforward: your Indiana deduction equals your federal deduction. Things get more nuanced for nonresidents and part-year residents, because Indiana only taxes tips sourced to Indiana.
For married couples filing jointly, the allocation is flexible but bounded: neither spouse can claim more than they would have been entitled to as a single filer. If spouses work in different Indiana counties, the county-level allocation must follow the same split used at the state level.
How Does the Indiana Overtime Deduction Work in 2026?
The overtime deduction under IC 6-3-2-32 works almost identically to the tips deduction. It starts with the qualified overtime compensation deduction on line 21 of federal Schedule 1-A, applies any federal phaseouts, and then prorates for nonresidents using the same formula: Indiana-sourced overtime divided by total overtime in federal AGI. The bulletin explicitly states that all the examples used for tips apply equally to overtime.
For employers and employees in NE Indiana's manufacturing and logistics sectors, this deduction could be meaningful. Workers in industries with significant overtime — think production floors in Allen County or CDL drivers operating out of Fort Wayne — may have received substantial qualified overtime pay in 2026. Those employees should make sure their tax preparer is aware of this deduction, and business owners who also draw wages from their S corp or C corp should confirm whether their compensation qualifies. Our team works extensively with Indiana manufacturers and can help you identify who on your team should be capturing this deduction.
How Does the Passenger Vehicle Loan Interest Deduction Work?
The vehicle loan interest deduction under IC 6-3-2-33 operates a bit differently from the tips and overtime deductions. For full-year Indiana residents, the Indiana deduction equals the federal deduction — the amount on line 30 of Schedule 1-A, subject to any federal income phaseouts. For part-year residents, the deduction is limited to interest paid while the taxpayer was an Indiana resident. Residency — not vehicle location or registration — is the determining factor.
The bulletin makes this explicit: an Indiana resident who registers and garages a vehicle in Florida still qualifies. A Florida resident who keeps a car in Indiana does not. The deduction follows the person, not the vehicle.
For married couples filing jointly, the calculation requires determining each spouse's Indiana-eligible interest separately, then combining subject to the federal deduction cap. The bulletin's examples (Examples 8 through 10) walk through situations where one spouse was an Indiana resident for only part of the year and where spouses were residents of different Indiana counties on January 1 — the county-residence date that governs local income tax liability.
What Happens to Out-of-State Tax Credits When You Take These Deductions?
Taking an Indiana deduction for tips or overtime affects how your credit for taxes paid to other states is calculated. Indiana computes the credit against the post-deduction Indiana tax on that income. In practical terms: if you're an Indiana resident who earned overtime in Illinois, Indiana's credit for the Illinois tax is limited to Indiana's tax on that income after the overtime deduction reduces it. The bulletin's Example 11 illustrates this precisely — an Indiana resident who earned $10,000 in overtime from Illinois sources could claim an out-of-state credit of only $1,475 (Indiana's post-deduction tax at 2.95% on the $50,000 of remaining Illinois-sourced income).
Similarly, if you're an Indiana resident earning tips from a job in another state, the credit calculation for that state's tax must account for any deduction the other state allows against tip income. The interaction between the Indiana deduction and the out-of-state credit can produce surprising results, and it's worth modeling before you file. This is the kind of multi-state planning scenario where our tax planning services add real value.
Who Should Be Paying Attention to These Deductions Right Now?
These deductions aren't just for W-2 employees. Here's a quick checklist of who should be reviewing their 2026 Indiana situation before December 31:
Restaurant, hospitality, and service workers in the Fort Wayne area who receive a significant portion of their compensation as tips.
Hourly manufacturing, healthcare, and logistics employees who worked overtime in 2026 — especially those who may be subject to Indiana county income tax.
Indiana residents who purchased or financed a passenger vehicle in recent years and are paying qualifying loan interest in 2026.
Nonresidents who work in Indiana but live across the border in Ohio, Michigan, or Illinois — the proration rules mean you may still capture a meaningful deduction even if only part of your income is Indiana-sourced.
Business owners paying wages with tip or overtime components — your employees need to know these deductions exist so they can claim them on their individual Indiana IT-40 returns.
Married couples with complex residency situations — the joint-filing allocation rules require careful attention to avoid overclaiming or underclaiming.
Because all three deductions expire after 2026 with no carryforward, there is no way to recover a missed deduction after the filing deadline. Indiana's standard three-year amended-return window won't help if the deduction simply didn't exist in any other year.
Sources
Income Tax Information Bulletin #128: Deductions for Tips, Overtime, and Vehicle Loan Interest. Indiana Department of Revenue. June 2026. https://www.in.gov/dor/files/reference/ib128.pdf
26 U.S. Code § 224 — Qualified Tips Deduction. U.S. House of Representatives Office of the Law Revision Counsel. https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section224
26 U.S. Code § 225 — Qualified Overtime Compensation Deduction. U.S. House of Representatives Office of the Law Revision Counsel. https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section225
26 U.S. Code § 163(h)(4)(B) — Qualified Passenger Vehicle Loan Interest. U.S. House of Representatives Office of the Law Revision Counsel. https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section163
Indiana Local Income Tax — County Tax Information. Indiana Department of Revenue. https://www.in.gov/dor/individual-income-taxes/filing-my-taxes/local-income-tax/
Indiana Code § 6-8.1-9-1 — Refund Claims. Indiana General Assembly. https://iga.in.gov/laws/2023/ic/titles/6#6-8.1-9-1
Written by
Warrior Business Services
Warrior Business Services is a boutique CPA firm in downtown Fort Wayne, Indiana, advising family-owned businesses and growth-minded owners across Northeast Indiana.