Does Ohio Tax Pension Income and Other Retirement Funds?

Ohio operates a graduated state income tax system, meaning tax rates increase as taxable income rises. For residents, this system generally applies to various forms of income. When it comes to retirement, understanding how the state treats different types of distributions is important for financial planning. Ohio does tax some forms of pension income and other retirement funds, although specific exemptions and credits are available to help reduce the tax burden.

Ohio’s Taxation of Retirement Income

Ohio generally taxes most forms of retirement income that are included in federal adjusted gross income. This encompasses distributions from private pensions, employer-sponsored 401(k) and 403(b) plans, and traditional Individual Retirement Accounts (IRAs). For instance, if a distribution from a private pension plan is recognized as income for federal tax purposes, it will typically be subject to Ohio’s state income tax. Roth IRA distributions, however, are typically tax-free in Ohio if they meet federal qualified distribution requirements.

Certain types of retirement income are specifically exempt from Ohio’s state income tax. Social Security benefits, for example, are not taxed by Ohio, even if a portion of these benefits is subject to federal income tax. To ensure these benefits are not taxed by Ohio, taxpayers must claim a deduction for taxable Social Security benefits on the Ohio Schedule of Adjustments. This deduction ensures that any Social Security income included in federal adjusted gross income is removed for Ohio tax purposes.

Additionally, certain railroad retirement benefits are exempt from Ohio taxation. The Social Security Equivalent Benefit (SSEB) portion of Tier I railroad retirement benefits is treated the same way as Social Security benefits for federal income tax purposes, and thus is not taxed by Ohio. Other railroad retirement benefits may also be deductible in computing Ohio adjusted gross income if they are exempt from state taxation under federal law.

Military retirement pay is also fully exempt from state income tax in Ohio, regardless of the recipient’s income level. This exemption applies to U.S. military pensions, military injury relief, and veteran’s disability severance payments, aligning with their federal tax treatment.

Available Deductions and Credits for Retirement Income

Ohio offers several tax benefits to mitigate the tax impact on retirement income, primarily through credits rather than broad deductions. One notable benefit is the Ohio Retirement Income Credit, designed to reduce the tax liability for eligible retirees. To qualify for this credit, a taxpayer’s modified adjusted gross income (Ohio adjusted gross income plus any business income deduction added back), minus exemptions, must be less than $100,000. The income must be received from a pension, retirement, or profit-sharing plan, such as traditional IRAs or 401(k) plans, and must be included in Ohio adjusted gross income.

The Retirement Income Credit is limited, offering a maximum credit of $200. The actual credit amount depends on the total retirement income received. Furthermore, taxpayers who have previously claimed the Ohio Lump Sum Retirement Credit are generally ineligible for the annual Retirement Income Credit in the current or future tax years.

In addition to the Retirement Income Credit, Ohio provides a Senior Citizen Credit and a Lump Sum Distribution Credit. The Senior Citizen Credit offers a $50 credit for taxpayers age 65 or older whose modified adjusted gross income less exemptions is less than $100,000. This credit is available per return and can also be claimed on the Ohio school district income tax return.

The Lump Sum Distribution Credit is an alternative for taxpayers age 65 or older who received their entire balance from an employee benefit plan, such as a 401(k) or pension, in a single taxable year. This credit replaces the annual Senior Citizen Credit, and if claimed, generally precludes claiming the Senior Citizen Credit on the same year’s Ohio income tax return or any future Ohio income tax return. This credit has a maximum of $1,000. This credit may be beneficial for those who receive a substantial one-time distribution, as it can offer a greater tax benefit than the annual retirement income credit.

Reporting Pension Income on Ohio Tax Returns

Reporting pension and other retirement income on an Ohio tax return begins with the federal adjusted gross income (AGI). Taxpayers then make specific additions and deductions on the Ohio Schedule of Adjustments to arrive at their Ohio adjusted gross income.

Taxable pension and retirement income, already included in the federal AGI, will flow through to the Ohio return. If a taxpayer has exempt income, such as Social Security benefits or military retirement pay, these amounts are deducted from the federal AGI on the Ohio Schedule of Adjustments.

After calculating the Ohio adjusted gross income and applying any applicable personal exemptions, the tax liability is determined. Taxpayers may then apply eligible credits, such as the Retirement Income Credit or the Senior Citizen Credit, to reduce their final Ohio income tax liability. The general process involves integrating federally taxable retirement income into the state’s AGI calculation, then adjusting for Ohio-specific deductions and applying available credits. It is possible to arrange for Ohio income tax to be withheld from monthly pension amounts by contacting the retirement benefits administrator.