How Ohio income tax works: federal AGI, the exemption, a zero bracket and 2.75%

Ohio’s income tax has three moving parts, and 2026 is the first year one of them stopped moving. Form IT 1040 starts from federal adjusted gross income, line 11 of the federal return. The state then adds a few things, subtracts more, takes off a personal exemption of $1,900 to $2,400 per person, and taxes what is left. For 2026 the tax on that “nonbusiness income” is zero on the first $26,050 and $332 plus 2.75% of everything above it, the same for every filing status. Business income is pulled out and handled separately: the first $250,000 is deducted and the rest is taxed at a flat 3%. There is no standard deduction, no itemizing, and no preferential rate for capital gains. Then the local governments take their turn: roughly 600 cities tax wages and business profits at 0.5% to 3%, and 210 school districts add 0.25% to 2% on a second return, the SD 100, filed with the state.

The federal AGI starting point decides most of what follows. Anything the federal return does after AGI, the standard deduction, itemized deductions, the $6,000 senior deduction, the new deductions for tips, overtime and car-loan interest, the qualified business income deduction, never reaches Ohio. Anything taken above the line, an IRA or HSA contribution, student loan interest, half of self-employment tax, flows through and cuts Ohio tax too. A tipped worker who owes no federal tax on $8,000 of tips still owes Ohio 2.75% on them if she is above the zero bracket, and owes her city on them regardless.

Who files

A full-year resident reports all income, wherever earned, and takes a resident credit on Form IT RC for tax paid to another state on income taxed by both. A part-year resident or nonresident reports everything on the IT 1040 as well, then works out a nonresident credit on Form IT NRC for the income that was not Ohio’s to tax. Residents of Indiana, Kentucky, Michigan, Pennsylvania and West Virginia who earn wages in Ohio are the exception: under the reciprocity agreements their Ohio wages are taxed only at home, and if nothing else ties them to Ohio they do not file here at all. Married couples use their federal filing status. The Department of Taxation recommends filing an IT 1040, or the one-page information notice Form IT 10, whenever federal AGI is above $28,450, even if no tax is due, because its matching program will send a bill to anyone with a federal return and no Ohio one.

Where it starts: federal AGI

Line 1 of the IT 1040 is federal adjusted gross income. Because it is AGI and not taxable income, the federal standard deduction, $32,200 on a joint return for 2026, plays no part, and neither does any itemized deduction. Mortgage interest, charitable gifts and state and local taxes have no Ohio effect; the federal SALT cap is a question Ohio never asks. The 2025 federal law changed none of this. Ohio’s legislature did adopt the federal act into state law in March 2026 (Senate Bill 9), but the deductions for tips, overtime, seniors and car-loan interest all sit below the AGI line, so adopting them changed nothing on the Ohio return. They are taxed here in full.

The additions

The Ohio Schedule of Adjustments lists a short set of additions. For most households only one ever comes up.

Other states’ municipal bond interest. Interest on bonds issued outside Ohio is added back; Ohio’s own municipal interest stays exempt. A brokerage 1099 that lumps all municipal interest together has to be split.

Bonus depreciation and section 179. Ohio has decoupled from federal bonus depreciation for two decades. A landlord, farmer or sole proprietor who took 100% bonus depreciation on a federal Schedule C, E or F adds back five-sixths of it, then deducts that add-back in equal pieces over the next five years. Over time it washes out; in the year of the purchase it does not. Section 179 expensing above the 2002 limit works the same way.

The subtractions

This is where the Ohio return gives money back, and the list is long. The ones most households meet are below; the Schedule of Adjustments runs past forty lines.

Line numbers are from the 2025 Schedule of Adjustments; the 2026 schedule is to come. Pensions, IRAs and 401(k)s are not on this list. Ohio taxes them, with a small credit instead; see Ohio for retirees.

The business income deduction. Nothing else on the Ohio return comes close to this. Income from a sole proprietorship, a rental, a farm, a partnership or S corporation K-1, or the sale of such a business is “business income.” The first $250,000 of it comes off on the Schedule of Business Income (Form IT BUS), and whatever is left is taxed at a flat 3% rather than running through the brackets. A plumber with $200,000 of Schedule C profit and nothing else pays no Ohio income tax on it. A nurse with $200,000 of W-2 wages pays about $5,000. The deduction does not reach wages a business owner pays himself through an S corporation, and it does not reach a city return; the cities tax net profits in full. It is also the most-examined line on the Ohio return. The Department looks at whether rental income is really a business and whether a K-1 reflects an interest the taxpayer materially participates in.

Medical expenses. This is the one place Ohio is kinder than the federal return. Anyone can deduct medical expenses above 7.5% of federal AGI, plus health, dental, vision and long-term care insurance premiums paid with after-tax money, whether or not they itemize federally. Medicare, Medigap and marketplace premiums (the part not covered by the premium tax credit) all count, with no floor.

529 contributions. Money put into Ohio’s CollegeAdvantage plan is deductible up to $4,000 per beneficiary per year. Married couples share the $4,000; it does not double. Anything above the limit carries forward to later years with no expiration, so a $20,000 deposit for one child is deducted over five years. Out-of-state plans do not qualify. Because the federal return asks nothing about 529 deposits, this is the deduction most often left off.

Ohio AGI, the exemption and the tax base

Federal AGI plus additions minus deductions is Ohio adjusted gross income, line 3. From it comes the personal exemption, line 4, one for the taxpayer, one for a spouse and one for each dependent on the Schedule of Dependents. The amount depends on Ohio “modified” AGI, which is Ohio AGI with the business income deduction added back in:

New for 2026: the exemption disappears entirely at $500,000 of modified AGI; the line was $750,000 for 2025. A person who can be claimed as someone else’s dependent gets $0. There is no extra exemption for age or blindness.

Ohio AGI minus exemptions is the Ohio income tax base, line 5. The business income left after the $250,000 deduction is taxable business income, taxed at 3%; the rest of the base is taxable nonbusiness income, taxed on the table below.

The rate: a zero bracket, then 2.75%

The $332 is the tax built up at the old lower rates on the dollars between the former brackets, kept as a fixed base. In 2025 the base was $342 and income over $100,000 was taxed at 3.125%; HB 96 (June 2025) collapsed that top bracket into 2.75% beginning in 2026. The $26,050 line is frozen for 2025 and 2026; indexing to the GDP deflator resumes for 2027. Every filing status uses the same table. Ohio has no joint brackets, so a married couple gets one $26,050 zero bracket, not two.

Capital gains, dividends, interest, unemployment, gambling winnings and pensions are all nonbusiness income taxed on this table. There is no special rate for gains and no deduction for gambling losses. Two new deductions for 2026 shelter certain gains, from investments in a certified Ohio venture capital operating company and from the sale of an Ohio-headquartered business the seller ran for at least five years; they are narrow, and the Department has not yet published how to claim them.

The credits

Ohio’s credits sit on the Schedule of Credits and nearly all are nonrefundable: they reduce the tax to zero and stop. Only a few, chiefly the pass-through entity tax credits for business owners and certain certificate credits, pay out beyond the tax. That includes the earned income credit, which in Ohio is a nonrefundable 30% of the federal credit and worth nothing to a family already inside the zero bracket.

The campaign contribution credit is gone for 2026. The joint filing credit tiers run by MAGI less exemptions: 20% up to $25,000, 15% to $50,000, 10% to $75,000, 5% above. Social Security and other deducted retirement income are not “qualifying income” for it, which keeps many retired couples out.

The local taxes

Municipal income tax. Ohio is one of a handful of states where cities tax income, and it does so more than any other. The tax is on wages, salaries, tips and the net profit of a business, generally 0.5% to 3%, with Columbus and Cleveland at 2.5% and Cincinnati at 1.8%. Retirement income, Social Security, interest, dividends and capital gains are not taxed by the cities. The city where you work withholds; the city where you live may tax the same wages and give a credit for what the work city took, in full or in part, and the credit rules differ from one city to the next. A worker who lives in a suburb with a partial credit and works downtown can owe both. Returns go to the city itself or to one of two collection agencies, RITA or CCA, never to the state. The Department of Taxation’s address lookup, The Finder, tells you which city and district you are in; it does not tell you the credit rules. Ask the city.

School district income tax. About 210 of Ohio’s 600-odd school districts, roughly half, levy an income tax of 0.25% to 2% on their residents. Unlike the city tax, this one is administered by the Department of Taxation and filed on Form SD 100 along with the IT 1040, with its own withholding (your employer needs the four-digit district number from Form IT 4) and its own estimated payments. About 70% of the districts use the “traditional” base: Ohio AGI less exemptions, so pensions, IRA withdrawals, interest and capital gains are all taxed, though Social Security is not since it never reached Ohio AGI. The other 30% use an “earned income” base of wages and self-employment income only, so retirees in those districts owe nothing. A $50 senior citizen credit applies on the SD 100 at 65. The district is a matter of where you live, not where the children go to school, and it is often not the same boundary as the city.

Withholding and estimated payments

Employers withhold Ohio tax from Form IT 4, which also carries the school district number. The withholding tables for the new 2.75% rate did not take effect until August 1, 2026, so for seven months of the year withholding was figured at the 2025 rates. Most single-job wage earners will see a larger Ohio refund than usual on the 2026 return. Two-earner couples can see the opposite in any year, because each employer withholds as if that paycheck were the family’s only income and gets a full zero bracket, when the couple gets just one.

Anyone who expects to owe more than $500 after withholding and credits must make estimated payments, due April 15, June 15, September 15 and January 15. The threshold is $500, not the federal $1,000. The safe harbor is 90% of this year’s tax or 100% of last year’s, paid in four equal installments; the interest penalty is figured on Form IT/SD 2210. The usual people caught are retirees with pensions, the self-employed, landlords and anyone who sold something at a gain.

How to file

Most Ohio returns are e-filed with the federal return through tax software or a preparer. The Department’s own portal, OH|TAX eServices, files the IT 1040 and SD 100 free, takes payments by electronic check with no fee, shows refund status, and keeps ten years of transcripts and 1099-Gs. The return is due April 15, 2027. Ohio piggybacks the federal extension: if you have one, you have until October 15, 2027, with no Ohio form, but the extension is to file, not to pay. Interest runs from April 15 on anything unpaid, so an extension payment goes in with the Ohio Universal Payment Coupon. E-filed refunds with direct deposit take about fifteen business days; paper returns, eight to ten weeks.

What trips people up

• Expecting the federal tips, overtime or senior deduction to cut Ohio tax. None of them reach the Ohio return.
• A pension or IRA left off the retirement income credit because nobody filled in the Schedule of Credits.
• Medical and insurance premiums left undeducted because the taxpayer “doesn’t itemize.” Ohio does not care.
• A CollegeAdvantage deposit nobody mentioned, because the federal return did not ask.
• Rental or K-1 income run through the brackets instead of the business income deduction, or the reverse: wages from an S corporation claimed as business income.
• Both spouses’ employers each giving a zero bracket, so the joint return owes.
• Filing the city return with the state, or not filing one at all because “the state has it.” RITA and CCA bill years later, with penalties.