by Olivia Smith
You likely have heard of tax credits, exemptions, and deductions. You may have even heard of nebulous terms such as “pass through entity tax” or “net operating losses”. But do you know how our tax code supports children in Indiana and how much of a difference that makes for families’ tax bill?
This week we’ll be looking at the individual income tax exemptions available in Indiana for taxpayers with children and see how that measures up against the cost of raising a family. We’ll begin with some definitions of the tools used in our tax code to provide tax relief to Hoosiers, then see how those mechanisms are used to support families with children.
Credits, Deductions, and Exemptions
Deductions and exemptions reduce the total amount of your income that is taxable. If your household income was $50,000 a year, claiming a $3,000 exemption would reduce your Indiana taxable income to $47,000. That means our state individual income tax rate of 3.05% would multiplied by the $47,000 to find your taxes owed; in this case, that means you would owe $1,422.50 in tax. Another way to think about it is that in Indiana, for each $100 of income you may deduct/exempt, you receive tax relief of $3.05.
On the other hand, credits are dollar-for-dollar tax relief applied to the amount of tax you owe. In the case of receiving a $300 credit, we would begin by finding taxes owed on your full Indiana income as $50,000 * 3.05% = $1,525. Then, the $300 credit would be subtracted from your tax owed to get an adjusted tax owed of $1,525 - $300 = $1,225.
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No deductions/ exemptions/ credits |
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$3,000 Exemption |
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$300 Credit |
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Indiana Income |
$50,000 |
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$50,000 |
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$50,000 |
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Apply Deductions + Exemptions |
$0 |
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-$3,000 |
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$0 |
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Adjusted Income |
$50,000 |
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$47,000 |
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$50,000 |
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Calculate Tax |
$50,000 * 3.05% |
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$47,000 * 3.05% |
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$50,000 * 3.05% |
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Indiana Tax Owed |
=$1,525 |
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=$1,433.50 |
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=$1,525 |
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Apply Credits |
$0 |
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$0 |
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- $300 |
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Adjusted Indiana Tax Owed |
$1,525 |
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$1,433.50 |
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$1,225 |
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Tax Benefit Received |
$0 |
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$91.50 |
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$300 |
Bottom line: Always be careful when considering the impact of exemptions and deductions compared to the impact of credits. It’s easy to think a larger sounding tax benefit will put more dollars in your pocket, but we just learned that a $300 income tax credit provides more than three times the tax relief of the $3,000 exemption in this scenario!
Support for Children in Indiana’s Tax Code
Currently, a taxpayer is permitted:
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A $1,000 exemption for each of the taxpayer’s dependents; and
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A $1,500 exemption for each of the taxpayer’s children, or an enhanced $3,000 exemption is for each child who is being claimed for the first time (born during the tax year).
Let’s use our knowledge of credits and deductions to look at how much tax relief that provides to families.
The maximum exemption amount is for a newborn child, who would receive the $1,000 dependent exemption and the $3,000 version of the child exemption for newborns, bringing total exemptions to $4,000 for that child. For a family living in Indiana, that would translate to state tax relief of $4,000*3.05% = $122. For a family with one older child, the exemption would be $1,000 + $1,500 regular child exemption for a total of $2,500 exempted and a resulting state tax relief of $2,500*3.05% = $76.25 annually. The amount of local tax relief will depend on the local income tax rate for a given county, but it is still calculated as income exempted multiplied by the county’s income tax rate.
Examples of Child Tax Relief for Families in St. Joseph County
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State Tax Relief (2024) |
Local Tax Relief* |
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A family raising a newborn |
$122.00 |
$70.00 |
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A family raising a preschooler |
$76.25 |
$43.75 |
*Using the county tax rate of 1.75% for St. Joseph County. County rates vary.
When we consider that diapers for a child cost about $1,000 annually and childcare costs in St. Joseph County range from $7,400 - $24,000 yearly, not to mention the medical costs associated with prenatal care, childbirth, and health care in the early years, it is clear that the maximum $122 of state tax relief being provided to Indiana families with young children is not sufficient to offset the financial burdens they are facing. We owe it to Hoosiers to provide more robust tax relief for families with children, especially young children in their most vulnerable years of life.
TL;DR : Deductions reduce the total amount of your income that is taxable, so in Indiana, for each $100 of income you may deduct, you receive a tax relief of $3.05. Credits are dollar-for-dollar tax relief applied to the amount of tax you owe. Currently, a taxpayer is permitted a $1,000 exemption for each of the taxpayer’s dependents and a $1,500 exemption for children or an enhanced $3,000 exemption is for a child who is being claimed for the first time (born during the tax year). When we consider the costs of raising a new child, it is clear that the maximum $122 of state tax relief being provided to Indiana families with young children is not sufficient to offset the financial burdens they are facing. We owe it to Hoosiers to provide more robust tax relief for families with children, especially young children in their most vulnerable years of life.
This blog post was funded by the Annie E. Casey Foundation. We thank them for their support but acknowledge that the findings and conclusions presented in this are those of the author alone, and do not necessarily reflect the opinions of the Foundation.