You’ve probably heard the rumors floating around Columbus or Cincinnati: Ohio is finally "fixing" the tax code. Honestly, it’s about time. For years, we’ve been dealing with a messy system of brackets that made filing feel like a part-time job.
But here is the thing.
Most people think a "flat tax" means everyone pays the exact same amount. That’s not quite how the state of ohio income tax works, especially with the massive changes hitting in 2026. If you’re living in the Buckeye State, your paycheck is about to look different, and not just because of the new 2.75% rate.
The 2.75% Reality: It's Not Actually Flat for Everyone
Starting January 1, 2026, Ohio is ditching the old tiered system for a single rate of 2.75%. Sounds simple, right? Well, sort of.
The biggest misconception is that this rate applies to every single dollar you earn. It doesn't. If you make $26,050 or less, you still owe $0 in state income tax. That "zero bracket" is a huge deal for students and part-time workers.
For everyone else, that 2.75% only kicks in on the money you earn above that $26,050 threshold.
💡 You might also like: David Bloom Con Artist: Why the Wall Street Whiz Kid Still Matters
Let’s look at why this matters. In 2024 and 2025, we were stuck in a transition phase. If you made over $100,000, you were likely paying 3.5% or 3.125% on that top chunk of change. Moving to 2.75% across the board is a massive win for high earners, but it also simplifies things for the middle class.
Why the "Business Income Deduction" is Still a Game Changer
If you’re a freelancer or a small business owner, you’re playing by a different set of rules. The state of ohio income tax has this unique quirk called the Business Income Deduction (BID).
Basically, the first $250,000 of your business income is completely exempt from state tax. Anything over that? It’s taxed at a flat 3%.
Wait, did you catch that?
The "flat" individual rate is 2.75%, but the "flat" business rate is 3%. This is a weird inversion. For the first time in a long while, it might actually be cheaper to have "non-business" income than business income if you're over the $250,000 mark. It’s a nuance that many people—and even some tax pros—might miss during this transition.
Municipal Taxes: The Hidden Trap
You can’t talk about Ohio taxes without talking about the "muni" tax. This is where the 2.75% flat tax dream goes to die for many residents.
Ohio has one of the most aggressive municipal tax systems in the country. Even if the state lowers its take, your city might be raising theirs. Take North Canton, for example. They recently approved a 0.5% income tax increase starting in 2026 to fund road paving and fire department operations.
- Most Ohio cities charge between 1% and 2.5%.
- You often pay where you work and where you live (though you usually get a partial credit).
- Remote workers are still fighting over which city gets their money.
If you live in a high-tax city like Columbus (2.5%), your total effective income tax rate isn't 2.75%. It’s actually 5.25%. That’s a big jump.
The New 2026 Venture Capital Perk
Here is something nobody is talking about: the Venture Capital Gains Tax Deduction.
If you’re an investor, 2026 is your year. Under the new rules, if you realize a capital gain from a certified Ohio venture fund, you can deduct 100% of those gains if they come from Ohio-based companies. If they're from out-of-state companies but through an Ohio fund, you still get a 50% deduction.
This is a blatant attempt by the state to keep tech wealth in places like Cleveland and the "Intel Corridor" near Newark. It’s smart, but it’s a very specific niche that most W-2 employees won't ever see.
What Happened to the Credits?
To pay for this 2.75% flat rate, the state had to trim the fat.
HB 96, which finalized these 2026 changes, tightened the belt on several popular credits. For starters, the campaign contribution credit is gone. You can no longer get a $50 (or $100 for joint filers) break for donating to a state candidate.
They also put a tighter cap on personal exemptions. If your Modified Adjusted Gross Income (MAGI) is over $500,000, say goodbye to those personal and dependent exemptions. The state figured if you’re making half a million a year, you don’t need a $2,000 deduction for your kid.
The School District Factor
Don't forget the SD100.
Just because the state form (IT 1040) is getting simpler doesn't mean your school district tax is going away. Roughly 200 school districts in Ohio charge an additional tax, usually ranging from 0.25% to 2%.
You need to check if your district uses the "traditional" base or the "earned income" base. The traditional base includes things like interest and dividends, while the earned income base is mostly just your paycheck. This distinction can cost you thousands if you have a large brokerage account.
Actionable Steps for the 2026 Tax Season
So, what do you actually do with this information?
First, check your withholding. Since the rate is dropping to 2.75%, you might be overpaying throughout the year. While a big refund feels nice in April, it’s basically an interest-free loan to the government. Adjust your W-4 or IT 4 if you'd rather have that cash in your bi-weekly check.
Second, review your business structure. If you’re a high-earning LLC owner, run the math on the 2.75% individual rate versus the 3% business rate. It might be time to change how you draw money from the business.
Third, look at the "Welcome Home Ohio" credits. If you’re involved in affordable housing or certain community development projects, the state is actually increasing some of these niche credits to offset the loss of general ones.
The state of ohio income tax is becoming one of the most competitive in the Midwest. We’re currently sitting with the second-lowest flat tax in the nation, trailing only Arizona. Whether you’re a lifelong Buckeye or just moved here for a job at the new Intel plant, the 2026 shift is going to make your tax life a lot simpler—even if the local cities still want their piece of the pie.
Stop worrying about the old brackets. Focus on that 2.75% number, keep an eye on your local city’s rate, and make sure you aren't leaving the Business Income Deduction on the table if you’re eligible.
Next Steps for You:
- Use the Ohio Department of Taxation's "The Finder" tool to verify your exact municipal and school district tax rates for your specific address.
- If you are a business owner, consult with a CPA before December 2025 to see if reclassifying certain income as "non-business" could save you that 0.25% difference.
- Update your payroll software to reflect the 2.75% flat rate for all employees earning over the $26,050 threshold to avoid massive year-end discrepancies.