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Indiana lawmakers could use the upcoming special session not only to draw new legislative maps but also to head off what tax experts call impending “chaos” for taxpayers and businesses.
Gov. Mike Braun has asked legislators to bring the state’s tax code in line with recent, major federal changes — warning of “discrepancies” between Indiana and federal law that could complicate 2025 tax filings.
Tax experts say that differences stem from the One Big Beautiful Bill Act, which made significant revisions to the federal Internal Revenue Code.
Indiana currently conforms to the federal tax code as it existed on Jan. 1, 2023, meaning recent federal changes aren’t automatically reflected in state law.
The Indiana Department of Revenue said it has identified 42 provisions in the new federal law that could affect state tax filings, including five with direct implications for 2025 returns filed in 2026.
Those include:
- Section 70402, which makes up to $5,000 of the adoption tax credit refundable starting in 2025;
- Section 70403, allowing tribal governments to designate children as having special needs for adoption tax credit purposes;
- Section 70307, providing 100% depreciation for certain manufacturing-related real property placed in service between 2025 and 2031;
- Section 71306, permanently allowing high-deductible health plans to cover telehealth services pre-deductible without affecting HSA eligibility; and
- Section 70509, which repeals accelerated depreciation for certain energy-related assets.
DOR officials told the Indiana Capital Chronicle that the agency is still evaluating the overall fiscal impact of all provisions.
‘This is vital’
Because Indiana is a “static” — not an “automatic” — conformity state, lawmakers must pass legislation to update the state’s definition of the Internal Revenue Code. Without that step, the state continues using the older version of federal law, even as taxpayers file under the new federal rules.
Matthew Will, an associate professor of finance at the University of Indianapolis, said Indiana’s approach means the legislature must affirmatively act each time Congress overhauls the federal tax code.
“This is vital,” Will said about expected tax changes to be made during the special session.
He emphasized that the OBBBA made “massive changes” to adjusted gross income definitions and deductions. He cited overtime and bonus depreciation as “two huge examples.”
He added that Indiana’s current conformity date — set to March 31, 2021 — no longer reflects years of subsequent federal updates and is now badly outdated. That leaves accountants and businesses unsure which federal rules the state actually follows.
“It is 100% necessary,” he continued. “Software providers like H&R Block and Intuit need guidance. Businesses really need to know how to proceed or face lawsuits if they guess wrong.”
Will warned that postponing action until the regular legislative session would likely sow confusion during the 2025 filing season.
“Once people start filing, you can’t make changes,” he said. “It would have been chaos. It would have been absolute chaos in the business world.”
The professor noted, too, that Indiana’s static system requires conscious legislative action to “decide whether to accept or reject” new federal provisions.
“The federal government changed the entire definition of adjusted gross income,” he said. “That’s the starting point where we make our changes. It’s one of the biggest things you could possibly do.”
The last major conformity update came in 2021, when Indiana adopted the Internal Revenue Code as of March 31, 2021, bringing the state into line with pandemic-era relief measures such as the CARES Act and the American Rescue Plan.
At that time, the DOR issued a 14-page bulletin listing numerous federal provisions Indiana chose not to follow, including exclusions for student loan forgiveness and certain charitable deductions.
Updating state tax law to reflect new federal definitions and deductions is a regular part of legislative housekeeping, though it usually happens during the regular session each winter.
“Maybe small things happen on a regular basis,” Will said. “But this is a substantial change.”
Chamber in support
The Indiana Chamber of Commerce said it supports a careful but timely review of the new federal provisions.
“Indiana has worked over many years to maintain a tax code that is broad-based, stable and relatively easy for individuals and employers to navigate,” said Natalie Goodwin, the chamber’s vice president of government affairs. “When federal legislation introduces new, highly targeted deductions or exemptions, states often need to determine whether adopting those provisions aligns with their own goals for tax simplicity and sustainable revenue.”
Goodwin said the chamber is “closely reviewing the federal changes and assessing where conformity would support Indiana’s long-standing commitment to a predictable and growth-oriented tax structure, and where selective decoupling may be appropriate.”
Will said the consequences of inaction could reach far beyond confusion for accountants.
“If you work overtime, it’s now not taxable at the federal level, but in Indiana, it currently is taxable,” he said. “So are we going to adopt the federal AGI definition, or are we in Indiana going to say, no, if you work overtime, it’s taxable? That’s huge.”
He credited Braun for tying the tax conformity measure to the same special session as redistricting.
“It’s dire,” Will said. “But it’s not sexy. So I’m so glad the governor is attaching it … because it’s vital. It would have been chaos.”
The special session officially begins Nov. 3, but legislative leaders don’t have to convene the exact day that Braun suggested. By law, the only rule is it can’t last for more than 30 session days or 40 calendar days.
In 2022, then-Gov. Eric Holcomb’s order began the session on July 6 but lawmakers didn’t convene until July 25, and it ended Aug. 5.
The Indiana Capital Chronicle is an independent, nonprofit news organization that covers state government, policy and elections.
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