Tax Terms: Credits, Deductions and Add-backs

December 13, 2017

Understanding the differences in credits, deductions, and add-backs is essential in filing an accurate Indiana individual tax return.

Taxpayers should complete federal tax returns through the federal adjusted gross income (AGI) line before beginning the Indiana individual income tax return.

Tax credits and tax deductions reduce the total amount of tax you pay.

Deductions reduce the amount of your income that is taxable. For example, the renter’s deduction in Indiana reduces the taxable income of a person who pays rent by a maximum of $3,000. Taxes are then calculated based on the amount of income after subtracting the amount paid for rent, or $3,000 (whichever is less) and other deductions.

Tax credits reduce the amount of the tax paid after deductions. For example, the tax credit for charitable contributions to an Indiana college or university is one-half of the contribution, or $100 (whichever is less). This amount is subtracted from the amount of the Indiana adjusted gross income tax that you owe for the year.

Although most of the expenses and deductions used to figure your federal taxes are allowed on your Indiana tax return, some do not and need to be “added back” to calculate the correct income used to figure Indiana income tax due. For example, 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. A taxpayer who received $421 in interest from purchased bonds issued by another state after Dec. 31, 2011, will have to “add back” $421 to the amount of income used to calculate the tax obligation for Indiana.

For more information, please see the following resources on the Indiana Department of Revenue website:

Deductions
Tax Credits
Add-backs

In addition, Information Bulletin #59 lists all the credits available to Indiana taxpayers.

Always refer to the instruction booklet for your specific tax return form for specific instructions when filing an Indiana individual tax return.