Indiana Adopts No Tax on Tips, Overtime Only for 2026 Tax Year

By Dan Carden
The Times, Munster, Ind.
(TNS)

Eligible Hoosiers whose earnings this year include gratuities or overtime will not be required to pay state or county income tax on the money when they file in 2027.

State lawmakers gave final approval Wednesday to legislation conforming Indiana’s tax laws—just for 2026—to the “no tax on tips” and “no tax on overtime” provisions of the federal One Big Beautiful Bill Act.

“This legislation is about making sure Hoosiers keep more of what they earn. By aligning Indiana’s tax code with the federal tax relief efforts, we’re able to provide hardworking Hoosier families with meaningful tax relief,” said state Sen. Travis Holdman, R- Markle, the sponsor of Senate Enrolled Act 243.

“I’m proud to champion this legislation as part of our ongoing work to protect taxpayers and continue Indiana’s record of responsible fiscal accomplishments.”

According to the nonpartisan Legislative Services Agency, the projected reduction in state and local government revenue from adopting the two federal provisions, along with up to $10,000 in tax-deductible interest on loans used to purchase U.S. assembled vehicles, may total as much as $237 million.

Holdman said the lost revenue will be made up by tapping a portion of Indiana’s reserve accounts, which currently contain about $2 billion but are projected to grow to approximately $5 billion by the June 30, 2027, end of the current state budget period.

It will be up to the 2027 General Assembly to decide whether to continue the income tax deductions in future years or to require Hoosiers to fork over state and local income tax on earnings and payments currently exempt from federal income tax through Dec. 31, 2028.

The measure additionally incorporates a proposal championed by state Sen. Dan Dernulc, R-Highland, that requires most cash-based tax transactions be rounded down to the nearest $0.05 increment beginning Jan. 1, 2027, to adjust for penny shortages caused by Republican President Donald Trump’s decision to phase out production of the one-cent coin.