In one of my recent columns, I casually referred to the fact that interest on U.S. Series E bonds is not taxable in Indiana. I was surprised at the quantity of responses I received from Indiana residents who were unaware of this fact.
The rule is that earnings on obligations that are considered to be direct United States Government obligations are specifically exempted from Indiana income taxation. Direct obligations include such items as U.S. government bonds, U. S. government certificates, U.S. government notes, and U.S. treasury bills.
The interest on these obligations is taxable on your federal tax return and gets included in your federal adjusted gross income. The adjusted gross income is the amount that is carried over to your Indiana income tax return and is used in the calculation of your Indiana income tax.
But, before you compute your Indiana income tax, there is line on the Indiana Income Tax return for "Indiana Deductions." There is a separate form, Indiana Schedule 1, where these deductions are listed, and there are several items on this form which are allowed as deductions on your Indiana tax return. Among the items not taxable in Indiana are the following:
Renter's deduction: Anyone paying rent for his personal residence in Indiana may be eligible to deduct part of the rent from Indiana income.
Interest on U.S. Government obligations: Income from direct U.S. obligations such as U.S. savings bonds (including Series E bonds), treasury bills, and government certificates is exempt from Indiana tax.
Taxable Social Security benefits: If a portion of your Social Security or Railroad Retirement benefits is taxable on the federal return, you may reduce your Indiana income by that amount.
Insulation: If you installed new insulation, weather stripping, double pane windows, storm doors, or storm windows in your home in Indiana, you may qualify for a deduction of the cost of the insulation plus up to $1,000 in labor.
Unemployment Compensation. Unemployment compensation that does not exceed a certain limit is exempt from Indiana income tax.
Indiana State Lottery Winnings. Strike it rich in the Hoosier Lottery and at least you don't have to worry about paying state income tax on the winnings.
In order to claim a deduction for any of the above items or other deductions that are allowed, you must fill out and attach Indiana Schedule 1 to your Indiana tax return, then carry the total amount of deductions back to page one of your tax return. Your federal adjusted gross income is then reduced by the amount of the deductions before the Indiana tax is computed. The Indiana Schedule 1 is included in the packet of forms that comes in the mail with your Indiana tax return.
If you get your tax forms from the library or post office, instead of using the packet in the mail, be sure to pick up Indiana Schedule 1 and a copy of the instructions that go with it. You may find that you've been missing out on some deductions.
Get a Refund for Years Gone By
For those of you who have been paying tax on items such as those listed in this column, you may amend prior year Indiana tax returns and claim a refund. Amend a prior year return by filing form IT-40X. The Indiana Department of Revenue will only pay refunds for amended returns going back three years from the original filing date of the return.
You can request a blank Form IT-40X and accompanying instructions by calling the Indiana Department of Revenue at (317)486-5103. You can also order forms by fax by calling (317)233-2329 from a fax machine, and forms can be downloaded from the Internet at http://www.ai.org/dor/ .
Roth IRAs in Indiana
In other Indiana tax matters, several people have asked me if Indiana will follow the federal guidelines on taxing conversions to Roth IRAs. The federal rules state that taxpayers who convert IRA funds to a Roth IRA during 1998 may opt to spread the conversion income over four years instead of being taxed on the income all at once in 1998. Indiana has announced that they will follow the federal guidelines on this issue.