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Important. The 2013 Indiana General Assembly has eliminated several previously required add-backs. See the 2013 Add-Back Update below for the list of these add-backs, plus instructions if you have been adding back any of them.
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, interest earned from a direct obligation of a state or political subdivision (municipal) is not taxable on your federal tax return (it is exempt). That being said, if it is interest income from a non-Indiana municipal obligation acquired after Dec. 31, 2011, it will have to be added back when completing your Indiana taxes. See OOS municipal obligation interest add-back below for additional information.
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. Get Schedule IT-40NOL to figure your Indiana loss.)
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
The 2013 Indiana General Assembly has eliminated several previously required add-backs. Detailed instructions concerning the below-listed add-backs are available beginning on page 13 of the 2013 IT-40 instruction booklet.
The following are no longer required to be added back:
*See the specific add-back instruction(s) if you have been adding back any additional business startup expenditures, expensing of environmental remediation costs, oil and gas well depletion deduction, qualified electric utility amortization and/or RIC dividends to nonresident aliens.
**Tax year 2012 was the last year to add back any educator expense, employer-provided education expenses and/or student loan interest deduction reported on your federal tax return.
The following are no longer required to be added back retroactive to tax year 2012:
If you reported any of the above-listed eight add-backs on your 2012 state tax return, you may be eligible for a refund or a reduction of any tax otherwise owed. See which of the two possible filing options works best for you.
Option 1 File an amended (corrected) 2012 state tax return (Form IT-40X) and make an adjustment to reverse the reporting of that add-back.
Example. Sherman reported a $590 tuition and fees deduction addback on his 2012 state tax return. He has decided to file an amended 2012 state tax return to eliminate the $590 amount initially added back, and will get a refund.
Option 2 You are not required to file an amended 2012 state tax return to eliminate the reporting of the add-back. Instead, you may report the amount to be adjusted on Schedule 1 of the current 2013 state tax return using a special 3-digit code indicator.
Example. Mr. Peabody added back a $1,200 IRA charitable distribution on his 2012 state tax return. Instead of filing an amended 2012 tax return, he has chosen to report the $1,200 amount as a negative
amount on the add-back schedule (Schedule 1). He will identify the entry with a special 3-digit code number issued specifically for this purpose for this one year. Read about the IRA charitable distribution
add-back on page 16 of the IT-40 instruction booklet for more information.