Illinois vs Indiana Taxes: The 2026 Border Comparison
Thousands of people cross the Illinois–Indiana line every day for work, and thousands more weigh a move across it. The tax differences are real but widely misunderstood: the income tax gap is smaller than advertised, the property tax gap is bigger, and there is no reciprocal agreement between the two states. Here is the full 2026 picture.
Income tax: closer than the headline rates suggest
Illinois charges a flat 4.95% on individual income, with no local income tax anywhere in the state — Chicago included. The mechanics of the flat rate, the exemptions and the credits are covered in our guide to the Illinois income tax rate.
Indiana looks dramatically cheaper at first glance: the state rate is 2.95% for 2026, down from 3.00% in 2025 and scheduled to fall to 2.9% in 2027. But Indiana layers a county income tax on top — all 92 counties charge one, at rates from 0.5% to 3.0%. The counties that matter most to Illinois readers: Lake County, home to Hammond and Gary, charges 1.5%; Porter County, the lowest in the state, charges 0.5%; Marion County — Indianapolis — charges 2.02%; and Randolph County tops the table at 3.0%.
Stack the layers and the gap narrows. A Lake County resident pays 2.95% plus 1.5%, a combined 4.45% — just half a percentage point below Illinois, before exemptions. A Randolph County resident pays 5.95% — more than Illinois.
Exemptions tilt the ground slightly further. Indiana has no standard deduction; it grants a $1,000 personal exemption for the taxpayer and spouse and $1,500 per dependent child. Illinois allows $2,925 per exemption for 2026, plus $1,000 each for taxpayers who are 65 or older or blind — though the Illinois exemption disappears entirely once federal AGI passes $250,000 ($500,000 on a joint return). For a middle-income family, Illinois shelters more income per person.
| Illinois | Indiana | |
|---|---|---|
| State rate | 4.95% flat | 2.95% flat (2.9% scheduled for 2027) |
| Local income tax | None anywhere | All 92 counties, 0.5% to 3.0% |
| Combined range | 4.95% everywhere | 3.45% to 5.95% depending on county |
| Personal exemption | $2,925 each (lost entirely above $250,000 AGI) | $1,000 taxpayer and spouse; $1,500 per dependent child |
| Retirement income | Exempt — Social Security, pensions, 401(k), IRA | Social Security and military retirement exempt; pensions, 401(k), IRA fully taxed |
Property tax: where Indiana wins big
If income tax is a coin flip in the border counties, property tax is a landslide. Illinois's effective rate on owner-occupied housing is 1.88% — among the highest in the country — while Indiana's is 0.76%. On identical $300,000 homes, that is roughly $5,640 a year in Illinois against $2,280 in Indiana at those average effective rates — a $3,360 annual gap.
Indiana also caps the bill constitutionally. Its circuit-breaker provisions limit property tax to 1% of gross assessed value for homesteads, 2% for other residential and agricultural land, and 3% for all other real and personal property. Illinois has no comparable cap — bills track local levies wherever they go. For homeowners, this single line item outweighs everything else in the comparison.
Sales tax: Indiana's is higher on paper, lower in practice
Indiana charges 7.00% statewide with no local sales taxes — the register total is the same in Gary, Indianapolis and the smallest rural town. Illinois starts lower at 6.25%, but local add-ons bring the average combined rate to about 8.96%, and Chicago now sits at 10.50% after the transit tax increase that took effect August 1, 2026. A Chicago shopper pays three and a half points more than a shopper across the state line — one reason the big-box stores cluster just inside Indiana.
A worked example: $100,000 in Cook County vs Lake County
Here is the arithmetic for one concrete household: a married couple with no dependents earning $100,000 in wages, owning a $300,000 home, and making $30,000 of taxable purchases a year — once in Chicago, Cook County, Illinois, and once in Lake County, Indiana, using each state's 2026 exemptions, the average effective property tax rates above, and Chicago's 10.50% sales rate against Indiana's flat 7.00%.
| Cook County, IL (Chicago) | Lake County, IN | |
|---|---|---|
| State income tax | $4,660 | $2,891 |
| County income tax | $0 | $1,470 |
| Property tax on a $300,000 home | $5,640 | $2,280 |
| Sales tax on $30,000 of spending | $3,150 | $2,100 |
| Total | $13,450 | $8,741 |
The working: in Illinois, two exemptions of $2,925 reduce $100,000 to $94,150 of taxable income, and 4.95% of that is $4,660. In Indiana, two $1,000 exemptions leave $98,000; the state takes 2.95% ($2,891) and Lake County takes 1.5% ($1,470), a combined $4,361. Property tax is simply each state's average effective rate applied to $300,000, and sales tax is the local combined rate applied to $30,000 of taxable spending.
The income tax difference is $299 a year — small enough that a single county-line change inside Indiana could erase it. The property tax difference is $3,360, more than eleven times larger. Anyone comparing the two states on income tax alone is looking at the wrong line. To see what either income scenario means per paycheck, run the numbers through the Illinois paycheck calculator or the Illinois income tax calculator.
These are estimates built on average effective rates, not a quote for any specific address — actual property bills vary enormously by township, school district and assessment. But the shape of the result is robust to reasonable tweaks in the assumptions.
Retirement income: the comparison flips
Everything above describes a working household. Retire, and the two states trade places. Illinois exempts essentially all federally taxed retirement income from its 4.95% tax — Social Security, public and private pensions, 401(k) withdrawals and IRA distributions all pass untaxed. Indiana exempts Social Security and military retirement pay, but taxes pensions, 401(k) and IRA distributions in full at the state rate plus the county rate.
A retiree drawing $60,000 a year from a pension and an IRA pays zero Illinois income tax on it; in Lake County, Indiana, the same income faces the combined 4.45%. Property tax still favors Indiana, but the popular assumption that Indiana is automatically the low-tax retirement choice is wrong. Our salary after taxes guide covers how the Illinois retirement subtraction works in practice.
Working across the border: no reciprocity, two returns
Here is the trap that catches the most people: there is no Illinois–Indiana reciprocal agreement. Illinois's reciprocal states are Iowa, Kentucky, Michigan and Wisconsin only. Wages earned across the line are taxed by the work state first, and the home state taxes them again with a credit.
Live in Indiana, work in Illinois. Your employer withholds Illinois tax, and you file an Illinois nonresident return with Schedule NR. Indiana then treats the same wages as resident income but grants a credit for the Illinois tax against the state portion of your Indiana bill. Because 4.95% exceeds 2.95%, the credit typically zeroes out the Indiana state tax — but the county tax generally still applies, so a Hammond resident commuting to Chicago pays Illinois 4.95% plus Lake County's 1.5%.
Live in Illinois, work in Indiana. Indiana taxes the wages on Form IT-40PNR, and a nonresident whose principal work county is in Indiana also pays that county's local income tax. Illinois then grants a credit on Schedule CR for the tax paid to Indiana. Since the Illinois rate is higher, you will usually owe Illinois the difference — worth checking against your withholding mid-year with our guide to how much tax comes out of a paycheck, rather than discovering it in April.
Gas, plates and the cost of driving
The border shows up at the pump too. Illinois collects a total of 66.4 cents a gallon in state taxes and fees on gasoline against Indiana's 52.4 cents. The Illinois motor fuel tax itself is 48.3 cents a gallon for gasoline and 55.8 cents for diesel, held flat from July through December 2026 because Public Act 104-0468 suspended the scheduled annual inflation increase. Vehicle registration runs the other way in shape: Illinois charges a flat $151 a year for standard passenger plates, while Indiana charges a $21.35 registration fee plus an annual excise tax based on the vehicle's value and age — and, in some counties, a wheel tax or surtax. An older car is usually far cheaper to register in Indiana; a newer one can owe meaningful excise tax.
The overall burden, measured
Put every tax together and the aggregate numbers are unambiguous. The Tax Foundation's state and local tax burden study for calendar year 2022 puts Illinois at 12.9% of income and Indiana at 9.3%. Its 2026 State Tax Competitiveness Index ranks Illinois 38th and Indiana 10th. Per-capita state and local collections tell the same story: $8,339 per Illinois resident against $5,964 per Hoosier in FY2023.
None of this makes either state "better" — the aggregate hides the cases where Illinois clearly wins. A retiree living on a pension does better in Illinois, full stop, and a worker in Randolph County, Indiana pays a higher combined income tax rate than anyone in Illinois. The honest summary: Indiana wins on property tax, overall burden and sales tax simplicity; Illinois wins on retirement income and the absence of local income taxes. Match those trade-offs to your own income, housing and stage of life — and test the income side with the salary and take-home calculator before you decide anything.
People also ask about Illinois and Indiana taxes
For most working households, yes — but not mainly because of income tax. Indiana's 2.95% state rate plus a county tax often lands within half a point of Illinois's flat 4.95%. The real gap is property tax: an effective 0.76% in Indiana against 1.88% in Illinois, which on a $300,000 home is worth over $3,300 a year. The Tax Foundation puts the overall state and local burden at 9.3% of income in Indiana versus 12.9% in Illinois for calendar year 2022. Retirees, though, often come out ahead in Illinois.
No. Illinois has reciprocal agreements with Iowa, Kentucky, Michigan and Wisconsin only — Indiana is not on the list, and Indiana's own reciprocity list does not include Illinois. That means wages earned across the border are taxed by the work state first, and your home state then taxes the same income while granting a credit for tax paid to the other state. You end up filing returns in both states, and Indiana county tax generally still applies on top.
Illinois taxes them first. Your employer withholds Illinois tax at 4.95%, and you file an Illinois nonresident return with Schedule NR covering your Illinois-source wages. Indiana then taxes the same income as resident income, but grants a credit for the tax you paid to Illinois against the state portion of your Indiana bill. Because the Illinois rate exceeds Indiana's 2.95% state rate, the credit usually wipes out the state portion — but your Indiana county income tax, such as Lake County's 1.5%, generally still applies.
Indiana taxes the wages first: you file Indiana Form IT-40PNR as a nonresident, and if your principal work county is in Indiana you also pay that county's local income tax — nonresident workers are not exempt from it. You then report the same income on your Illinois return and claim a credit on Schedule CR for tax paid to Indiana. Since Illinois's 4.95% is higher than Indiana's 2.95%, expect to owe Illinois the difference at filing time.
On income tax, Illinois — decisively. Illinois exempts essentially all federally taxed retirement income: Social Security, pensions, 401(k) withdrawals and IRA distributions all escape the 4.95% tax entirely. Indiana exempts Social Security and military retirement pay but taxes pensions, 401(k) and IRA distributions in full at the state rate plus the county rate. Property tax still favors Indiana, so the full picture depends on your housing and income mix.
This is the widest gap in the whole comparison. Illinois's effective property tax rate on owner-occupied housing is 1.88%, among the highest in the nation; Indiana's is 0.76%. Indiana also has constitutional circuit-breaker caps — property tax cannot exceed 1% of gross assessed value for a homestead, 2% for other residential and agricultural land, and 3% for other property — so the bill has a hard ceiling. Illinois has no comparable cap. On a $300,000 home the difference is roughly $5,640 versus $2,280 a year at those average effective rates.
Indiana charges a flat 7.00% statewide with no local sales taxes at all — the rate is the same in every city and county. Illinois starts at 6.25% at the state level but layers local add-ons that push the average combined rate to about 8.96%, and Chicago sits at 10.50% following the transit tax increase that took effect August 1, 2026. Shoppers in most Illinois cities — especially Chicago — pay more at the register than shoppers anywhere in Indiana.
That is the current schedule. Indiana's state rate fell from 3.00% in 2025 to 2.95% for 2026 and is scheduled to drop again to 2.9% in 2027 under the phased cuts the legislature enacted. County income tax rates, though, are set locally each year by the 92 counties and can move in either direction — they currently range from 0.5% in Porter County to 3.0% in Randolph County. Illinois's 4.95% flat rate, by contrast, has been unchanged since 2017.
Sources
- Illinois Department of Revenue — individual income tax, Schedule NR and Schedule CR
- Indiana Department of Revenue — Departmental Notice #1, county income tax rates
- Indiana Department of Revenue — Form IT-40PNR and nonresident filing
- Tax Foundation — state and local tax burdens by state
- Tax Foundation — 2026 State Tax Competitiveness Index
- Indiana Department of Local Government Finance — circuit-breaker property tax caps
Rates and figures reflect 2026 law unless a year is stated, and the worked example is an illustration built on average effective rates, not tax advice for any specific household or address. Cross-border filing can be complicated — a credentialed preparer familiar with both states is worth the fee the first year you commute or move.