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You must complete your federal tax return (Form 1040, 1040A or 1040EZ)* through the federal adjusted gross income (AGI) line before beginning to figure your Indiana individual income tax return. While it is true that most of the expenses and deductions used to figure your federal taxes are also allowed on your Indiana tax return, in fact not all of them are. Some of these will have to be “added back”.
For instance, Indiana does not allow individuals to claim a student loan interest deduction. If this deduction is claimed when figuring your federal taxes, it will have to be “added back” when completing your Indiana taxes.
Example. Steve reported $30,000 wage income and claimed a $750 student loan interest deduction on his federal tax return. Steve’s federal AGI is $29,250 ($30,000 wage income - $750 student loan interest deduction).
Steve properly entered his $29,250 federal AGI on line 1 of his state tax return, Form IT-40. Since Indiana does not allow for a student loan interest deduction, and the deduction was already used when figuring Steve’s federal AGI (line 1 of Form IT-40), he will have to add back the $750.
Steve will report $750 on line 7 of Indiana’s Schedule 1: Add-Backs.
Below is a list and a brief discussion or the more commonly reported add-backs:
The complete list of add-backs can be found in the current year IT-40 instruction booklet.
You must make an exception for any bonus depreciation deduction used for property placed in service after Sept. 11, 2001. Bonus depreciation is the additional first-year special depreciation deduction allowed under Section 168(k) of the Internal Revenue Code (IRC).
Figure the net income (or loss) which would have been included in federal adjusted gross income had the bonus depreciation method not been used. The difference, which may be a positive or negative amount, must be added back.
Example. Mack used the bonus depreciation method for federal income tax purposes. After refiguring the depreciation without using the bonus method, he has to add back $1,500 on his Indiana tax return.
For additional information, see Commissioner’s Directive #19 at www.in.gov/dor/3617.htm.
Any net operating loss deduction taken on line 21 of your federal Form 1040 must be added back. Write the amount of the net operating loss as a positive figure. (You will claim an Indiana net operating loss deduction on Indiana’s Schedule 2, under line 11.)
Any interest earned from a direct obligation of the State of Indiana or a political subdivision of the State of Indiana is not taxable for Indiana income tax purposes.
Interest earned from a direct obligation of a state or political subdivision other than Indiana is taxable to Indiana if the obligation was acquired after Dec. 31, 2011. Interest earned from obligations held or acquired prior to Dec. 31, 2011, is not subject to Indiana income tax.
Example. Martha, an Indiana resident, purchased bonds issued by the city of Washington, Indiana. The $247 interest income received from these bonds is exempt from tax by Indiana. She also purchased bonds issued by the city of San Antonio, Texas. She received $421 interest from these bonds, which were purchased after Dec. 31, 2011. She will have to add back the $421 interest received from the OOS municipal bonds.
For additional information, see Information Bulletin #19 at www.in.gov/dor/3650.htm.
You may have figured an IRC Section 179 expense using a ceiling of more than $25,000 for federal tax purposes. Indiana allows you to figure IRC Section 179 expense using a ceiling of no more than $25,000.
If you figured IRC Section 179 expense using a ceiling amount of more than $25,000, you’ll need to add back the difference between it and $25,000.
*Plus Forms 1040NR/1040NR-EZ, filed by U.S. Nonresident Aliens