The Indiana Department of Revenue issued guidance regarding the change to local income tax rates effective January 1, 2017.

As we reported in Tax Alert 2015-922, 2015 HB 1485 requires that local income taxes collected by Indiana counties be consolidated into one local income tax rate per county. The bill also requires that both residents and nonresidents living and/or working in the county pay at one local income tax rate, increasing the local taxes paid by nonresidents.

Employees report their county location on Form WH-4, Employee's Withholding Exemption & County Status Certificate.

Guidance details

According to Department Notice #42, HB 1485 will not affect the resident tax rates in effect on May 1, 2016. The rates in effect on May 1, 2016, continue to be in effect on January 1, 2017, unless the county acts to change its county income tax rates between July 1, 2016, and October 31, 2016.

The only change is that one applicable effective January 1, 2017, is that the local income tax rate is imposed on all "local taxpayers", as opposed to different rates for county resident and nonresident taxpayers applicable under the county adjusted gross income tax and county option income tax.

The definition of a local taxpayer is either:

— An individual who resides in a county on January 1 of the tax year ("resident taxpayer")

— An individual who does not reside in a county that has imposed a local income tax on January 1 of the tax year, but whose principal place of business or employment is in a county that has imposed a local income tax ("nonresident taxpayer"). This statutory definition is unchanged from the previous county income taxes imposed. No changes based on residency are required solely based on the imposition of the local income tax.

Because Indiana law now does not provide for different local income tax rates for resident and nonresident taxpayers, an employer must withhold the local income tax at the same rate for all individuals subject to that county's tax rate. A person subject to local income tax for a county is subject to tax at the same rate, regardless of whether the individual is a resident or nonresident taxpayer.

Effective January 1, 2017, the Department will publish one local income tax rate in Departmental Notice #1 and in its return instructions for tax years starting in 2017.

Departmental Notice #1 is published on the Department's website twice a year and is effective January 1 and October 1 each year. Other than listing one rate as opposed to two, no changes in the publication dates or location of publication on the Department's website will occur.

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