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Senate Enrolled Act 480 exempts active-duty military pay from Indiana's income tax and increases the maximum allowable state income-tax deduction on military pay, including retirement and survivors' benefits, from $2,000 to $5,000 ($10,000 for couples filing jointly).

Per Indiana Instructions for Form IT-40, page 18:

If you cannot open the link above, alternatively you can click on the link for the Indiana IT-40 Booklet at the Indiana webpage for individual taxpayers for the following information:.

Line 7 - Military Service Deduction

The income on line 1 of Form IT-40 may include active or reserve military pay. If it does, you will be able to take a deduction (regardless of your age). 

Also, if you are retired from the military or are the surviving spouse of a person who was in the military, you may be able to take this deduction. You will be eligible if:
  • You were at least 60 years of age by Dec. 31, 2014,
  • You were receiving military retirement or survivor's benefits in 2014, and 
  • The benefits received as retirement income were reported on your federal return.
Your deduction will be the actual amount of military income received (i.e. military pay, retirement pay and/or survivor's benefits) or $5,000, whichever is less. If both you and your spouse received military income, you may each claim the deduction for a maximum of $10,000.

Important: If you served in the Indiana National Guard or the reserve component of the armed forces during 2014, see the National Guard and reserve component members deduction on page 22.

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