Section 45IAC3.1-1-5. Modifications to federal adjusted gross income to determine Indiana adjusted gross income

   Modifications to Adjusted Gross Income as Defined in Internal Revenue Code § 62 Which Are Required in Determining Indiana Adjusted Gross Income for Individuals. The following modifications to Federal Adjusted Gross Income as defined in Internal Revenue Code § 62 must be made in determining Indiana Adjusted Gross Income:

  (1) Subtract income exempt from state taxation by the Constitution and/or statutes of the United States.

(a) Exempt interest:

  All interest reported for federal tax purposes must be reported for Indiana Adjusted Gross Income Tax purposes. However, in determining taxable interest income for Indiana Adjusted Gross Income Tax purposes, a deduction may be taken for interest received on direct obligations of the federal government or its agencies, as required under 31 USC 742. Such deduction is not allowed for interest attributable to loans or other financial obligations on which the federal government is merely a guarantor or insurer.

  Interest from the following United States Government obligations is deductible for Indiana Adjusted Gross Income Tax purposes. The list is not all inclusive:

  Banks for Cooperatives

  Central Banks for Cooperatives

  Commodity Credit Corp.

  District of Columbia

  Export-Import Banks of the United States

  Farm Credit Banks

  Farmers Home Corp.

  Federal Deposit Insurance Corp.

  Federal Farm Loan Corp.

  Federal Financing Banks

  Federal Home Loan Banks

  Federal Housing Administration

  Federal Intermediate Credit Banks

  Federal Intermediate Credit Corp.

  Federal Land Banks Association

  Federal Land Banks

  Federal Savings and Loan Insurance Corp.

  Home Owner's Loan Corp.

  Joint Stock Land Banks

  Maritime Administration

  Production Credit Associations

  Series E, F, G and H Bonds

  Small Business Administration

  U.S. Government Bonds

  U.S. Government Certificates

  U.S. Government Notes

  U.S. Housing Authority

  U.S. Treasury Bills

  U.S. Maritime Commission

  U.S. Possessions─obligations of Puerto Rico, Virgin Islands, etc.

  U.S. Postal Service (Bonds)

  Tennessee Valley Authority (Bonds only)

  Interest and other earnings on these securities are taxable:

  Building and Loan Associations

  Credit Union Share Accounts

  District of Columbia Armory Board

  Federal National Mortgage Association*

  Federal or State Savings and Loan Associations

  Government National Mortgage Associations

  Panama Canal Bonds

  Phillipine Bonds

  Also, interest received in the following instance is taxable:

(a) On refunds of federal income tax

(b) On interest-bearing certificates issued in lieu of tax exempt securities, such income losing its identity when merged with other funds

(c) On debentures issued to mortgages or mortgages foreclosed under the provisions of the National Housing Act

(d) On Promissory notes of a federal instrumentality

(e) On Federal Home Loan Time deposits

(f) On FSLIC secondary reserve prepayments

(g) On Government National Mortgage Association participation certificates and on Federal Home Loan Mortgage Corporation participation certificates in mortgage pools

(h) On U.S. Postal Service certificates and savings deposits

(i) On participating loans in the Federal Reserve System for member banks (Federal Funds)

(j) Farmer's Home Administration

  *[NOTE: The Department has determined that interest paid by the Federal National Mortgage Association (FNMA) is subject to Indiana income taxation because FNMA has been a government sponsored private corporation since 1968. Thus, its obligations are not obligations of the federal government, and interest paid by FNMA will be considered taxable as of January 1, 1974. Further, where FNMA stock is traded on national stock exchanges, dividends from such stock are taxable.]

  [NOTE: Although municipal bond interest (including interest on public housing authority bonds) and bond interest from United States Government obligations are excludable, the gain derived from the sale of tax-exempt municipal bonds and United States Government obligations held as investments is included in Gross Income. The gain to be reported for Indiana tax purposes is the gain reported for federal income tax purposes. Losses sustained are deductible, subject to capital loss limitations.]

(b) Income of nonresidents and part-year residents:

  Income earned by a nonresident or part-year resident which is from an out-of-state source, which is earned while not a resident of Indiana, and which is received while not a resident of Indiana is exempt from Adjusted Gross Income Tax under the Constitution of the United States. Such income should be deducted from Federal Adjusted Gross Income in determining Indiana Adjusted Gross Income. Nonresidents and part-year residents excluding income under this subsection may take deductions pursuant to Regulation 6-3-1-3.5(a)(010) [45 IAC 3.1-1-1] only to the extent that the deductions were derived from income taxable to Indiana.

  (2) Add back an amount equal to any deduction or deductions taken pursuant to Internal Revenue Code §62 for income taxes levied by any state of the United States, and for real estate and personal property taxes levied by any subdivision of any state of the United States. The add back does not include income taxes paid to cities and foreign countries. The add back is not required by individuals deducting these taxes as itemized deductions, since such deductions are not allowed in determining Federal Adjusted Gross Income.

  Individuals with business-related automobile expenses must add back annual motor vehicle taxes taken as a deduction under Internal Revenue Code §63. However, such add-back does not include the minimum motor vehicle excise tax and registration fee.

  (3) Subtract the $1000 personal exemption. In the case of a joint return, the exemption is limited to the lesser of $1000 or the Adjusted Gross Income of each spouse computed without regard to the modification for additional exemptions allowed under IC 6-3-1-3.5(a)(4). However, in no event will the exemption for each spouse be less than $500.

  (4) Subtract $1000 for each exemption taken on the Federal return for taxpayer or spouse aged 65 or over, [Internal Revenue Code §151(c)]. Subtract $500 for each exemption taken on the Federal return for taxpayer's or spouse's blindness [IRC §151(d)]. Subtract $500 for each exemption taken on the Federal return for a qualified dependent [IRC §151(c)]. The taxpayer may also subtract $500 for the spouse if they are making separate returns, and if the spouse, for the calendar year in which the tax year of the taxpayer begins, has no gross income.

  (5) Subtract taxes based on or measured by income which were paid to a political subdivision of a state other than Indiana. Such payment must be verified by filing with the taxpayer's return a withholding statement and a statement from the taxing authority indicating the taxes withheld and paid to such entity.

  (6) Add back an amount equal to the ordinary income portion of a lump-sum distribution from a qualified pension or profit-sharing plan if the distribution is taxable under Internal Revenue Code §402(e).

  (7) Subtract items included in Federal taxable income as a recovery of items previously taken as an itemized deduction on the Federal return.

  (8) Subtract all amounts received as supplemental railroad retirement benefits which were not previously deducted.

  (9) Prorate modifications 3, 4, and 5 [subsections 3, 4, and 5 of this section] above if the taxpayer is a nonresident or part-year resident of Indiana. These modifications must be reduced to an amount which bears the same ratio to the total allowable modifications as the taxpayer's Indiana Adjusted Gross Income before allowing modifications 3 and 4 [subsections 3 and 4 of this section] above bears to his total Adjusted Gross Income. However, married taxpayers residing in different states who elect to file separate returns are entitled to the same number of exemptions that each claimed on their separate federal returns.

  EXAMPLE: John Smith moves to Indiana from Ohio in June of 1978. His 1978 Adjusted Gross Income while living and working in Ohio was $10,000. His 1978 Adjusted Gross Income after moving to Indiana is $15,000. John is single, under 65, not blind, and he has one dependent. Before proration, he would be entitled to $1500 in exemptions from his Indiana Adjusted Gross Income (a $1000 personal exemption plus a $500 exemption for his dependent). However, he must prorate his exemptions on the ratio of

Indiana Adjusted Gross Income.

Total Adjusted Gross Income

Thus, he will be allowed $900 in exemptions from his Indiana Adjusted Gross Income

  EXAMPLE: Dick and Nancy Martin are a married couple living apart. Dick is a resident of California, while Nancy is an Indiana resident. The Martins have three children. On their separate federal returns, Dick claimed two of the children as exemptions, while Nancy claimed the other one. Therefore, on her Indiana income tax return, Nancy is entitled to $1500 in exemptions (a $1000 personal exemption plus a $500 exemption for the dependent claimed on her federal return) assuming she has at least $1000 in adjusted gross income.

  (10) Military Personnel:

  A deduction is allowed those Indiana residents who are members of the active and reserve units of the United States Armed Forces. Members of the Army, Navy, Air Force, Coast Guard, Marine Corps, Merchant Marine, Indiana Army National Guard, or Indiana Air National Guard may deduct, as a modification from adjusted gross income on the individual income tax return, an amount equal to the military compensation received or $2,000.00, whichever is less.

  As a resident of Indiana, an individual or the individual's surviving spouse is allowed an adjustment up to $2,000.00 for retirement pay or survivor's benefits received as the result of the individual's active or reserve service in the armed forces of the U.S. provided that: (1) The individual or the individual's surviving spouse is at least sixty years of age on the last day of the taxable year, and (2) The Credit for the Elderly is not claimed. However, if a taxpayer has active duty, reserve and/or retirement pay in one tax year, in no case may the total deduction for military pay exceed $2000. If both the taxpayer and spouse receive military compensation, both would qualify for this deduction. Military withholding statements or retirement or survivor's benefit statements must be attached to the individual income tax return in order to claim this deduction. Military personnel on active or reserve duty who are afforded the $2000 deduction are limited in the amount of deductions related to military income, i.e., unreimbursed travel expenses, which they may take pursuant to Regulation 6-3-1-3.5(a)(010) [45 IAC 3.1-1-1]. The Taxpayer may take as a deduction for Indiana Adjusted Gross Income Tax purposes that percentage of his total deductions which is produced when the taxpayer's military income less the $2000 deduction is divided by his total military income.

  EXAMPLE: Major Jones is an Indiana resident earning $40,000 in military pay during 1979. As a part of his duties, he is required to do some traveling for which he is not reimbursed. His 1979 traveling expenses are $3000. However, since he is eligible for the $2000 military pay deductions, these traveling expenses must be prorated on the ratio of

military income - $2000.

military income

Thus, he is entitled to a deduction of $2850 for traveling expenses

  (11) Subtract the taxpayer's share of income from a partnership subject to Adjusted Gross Income Tax, Gross Income Tax, or Supplemental Net Income Tax under IC 6-3-7-1(b).

  (12) Subtract a civil service annuity adjustment calculated as follows:

  From the first two thousand dollars ($2000) received during the taxable year from a federal civil service annuity that is included in Adjusted Gross Income under §62 of the Internal Revenue Code, subtract the total amount of railroad retirement benefits and social security benefits received during the tax year.

  In order to claim this deduction, the individual must be at least 62 years of age by the end of the tax year, and must not claim the Credit for the Elderly contained in IC 6-3-3-4.1 [Repealed by P.L.25-1981, SECTION 9.].

  EXAMPLE: Jane Johnson is retired on a federal civil service annuity. She is 64 years old, and does not claim the Credit for the Elderly. During 1980, Jane's annuity payments were $8400 and her social security benefits were $900. In calculating her civil service annuity adjustment, Jane will subtract her social security benefits of $900 from the first $2000 of her annuity. Therefore, Jane's adjustment is $1100 ($2000 - $900 = $1100).

  EXAMPLE: George Black is retired on a federal civil service annuity. He is 78 years old, and does not claim the Credit for the Elderly. During 1979, George's annuity payments were $1800. He received $1500 in social security benefits, and $400 in railroad retirement benefits. In calculating his civil service annuity adjustment, George must subtract his social security benefits of $1500, and his railroad retirement benefits of $400 from his annuity. Therefore, George cannot claim the civil service annuity adjustment $1800 - $1500 - $400 is less than zero). Income of $1800 must be reported for Indiana tax purposes. (Department of State Revenue; Reg. 6-3-1-3.5(a)(050); filed Oct 15, 1979, 11:15 am: 2 IR 1512; errata, 2 IR 1743)