Have you heard that Ohio's income tax has changed to a 2.75% flat rate starting this year? The first question retirees usually ask is about how this affects their pension and Social Security taxes.

I was curious too, so I looked into the Ohio Department of Taxation's materials and state law. To sum it up, it's simpler than expected, but there are a few traps to watch out for.

First, let's look at the basic framework. The tax rate structure changed with the state budget bill HB 96, signed by Governor DeWine on June 30, 2025.

Starting in the 2026 tax year, a 2.75% flat rate will apply to non-business income exceeding $26,050. Income below $26,050 is taxed at 0%.

However, there's a twist here. According to the 2025 tax rate table, the range from $26,050 to $100,000 was already at 2.75%.

What changed in 2025 is that the rate for income over $100,000 dropped from 3.5% to 3.125%, and in 2026, that range will be combined into the 2.75% rate. So, for those with taxable income below $100,000, there won't be a significant change in the tax rate itself.

Honestly, I was a bit disappointed by this. From the news, it sounded like everyone's taxes were going to drop significantly.

Now, let's talk about the most important aspect for retirees: Social Security. Ohio fully exempts the portion of Social Security that is included in federal income from state tax calculations.

While some benefits may be taxable at the federal level depending on income, Ohio's state tax structure allows for that amount to be deducted on the Schedule of Adjustments. Railroad retirement pensions are similarly exempt.

On the other hand, company pensions, 401(k) withdrawals, and traditional IRA distributions are subject to Ohio state income tax. This is the largest portion of taxes for retirees.

However, there are a few small credits available. Think of them as small backup generators that keep running steadily.

The first is the retirement income credit. If the money received from pensions or retirement plans is included in Ohio AGI, and the amount after deductions from MAGI is under $100,000, you can qualify for this credit.

The amount varies based on retirement income. If it's under $500, it's 0; if it's over $8,001, the maximum is $200, with a cap of $200 per return.

The second is the senior credit. If you are 65 or older at the end of the tax year and meet the same income criteria, you can receive a $50 deduction per return.

The third is a one-time payment credit, but this one requires caution. If you take a lump sum from a retirement plan and use the one-time retirement credit, you won't be able to claim the retirement income credit for that year or in the future.

Similarly, if you receive a lump sum distribution credit, you won't be able to use the $50 senior credit afterward. Once you choose, it's a decision you can't reverse, so it's best to calculate and decide carefully.

That's the state tax situation, and for those living in Columbus, you also need to pay attention to city income tax. The city income tax rate is 2.5%.

Fortunately, Ohio Revised Code 718.01 exempts Social Security, railroad retirement pensions, and pension payments from retirement plans from city income tax. This means that the 2.5% tax does not apply to retirement income.

However, if you work part-time after retirement and receive a salary, that income is, of course, subject to city income tax. Not all income is exempt just because you are retired.

The last trap is the school district income tax. In Ohio, there are school districts that collect income tax separately from state tax.

School district income tax has two types of tax bases. Traditional base districts tax pensions, IRA distributions, interest, and dividends, while earned income base districts only tax wages and self-employment income.

In either case, Social Security is not subject to school district income tax. However, if you move to a traditional base district, an additional tax may apply to your pension, so if you plan to move after retirement, it's good to check in advance.

You can find out which school district your address is in and whether that district collects taxes by entering your address in The Finder on the Ohio Department of Taxation's website. I tried it, and it only takes a minute.

To summarize, Social Security is exempt from state, city, and school district taxes.

Company pensions and IRA distributions are subject to state tax, but pension payments are exempt from city income tax, and school district taxes vary by location. Additionally, if you meet the income criteria, you can receive credits of up to $200 and $50.

While the credit amounts may seem small and easy to overlook, they can accumulate over the years and provide consistent support. However, decisions like the lump sum option, which are made all at once, should be considered alongside retirement income methods, other income, and federal taxes, as they can vary based on personal circumstances, so be sure to consult a tax professional.

If it were me, I would first pull out last year's 1099-R and Ohio IT 1040 to check if I properly received the retirement income credit. Many people overlook this more than you'd think.

What's more important than the 2.75% tax rate is knowing which bracket your income falls into. Just like a small atom can generate great power, checking a few documents can significantly change your taxes after retirement.