Direct Indexing in Ohio: The 26.55% Rate and Why City Income Taxes Don't Apply

Ohio's 2.75% flat income tax (effective TY2026 under HB 96) produces a 26.55% combined long-term capital gains rate — higher than Texas or Florida by 2.75 percentage points, but meaningfully lower than California (37.1%), New York City (38.6%), or Massachusetts (32.8%). What makes Ohio unusual: the state's municipal income taxes — Columbus 2.5%, Cleveland 2.5%, Cincinnati 1.8% — generally do not apply to capital gains from investment portfolios. For Ohio investors with taxable accounts above $500K, the DI break-even math is positive, and for those with equity compensation at P&G, Sherwin-Williams, Parker Hannifin, or KeyBank, coordinating a direct-indexed loss bank with RSU vesting can add thousands per year in after-tax value.

Ohio's 2.75% flat rate — no preferential rate on long-term gains

Starting with tax year 2026, Ohio simplified its income tax to a single flat rate of 2.75% on all income above $26,050, per HB 96 (the state's FY2026–2027 budget bill).¹ Income at or below $26,050 is taxed at 0%. There are no brackets above the flat rate.

Ohio provides no preferential rate for long-term capital gains. Unlike the federal system — where LTCG rates are 0%, 15%, or 20% depending on income — Ohio treats both short-term and long-term capital gains as ordinary income at the same 2.75% flat rate. This means the combined federal+state rate for an Ohio investor in the top federal bracket stacks as follows:

For 15%-bracket Ohio investors (income below the 20% federal LTCG threshold), the combined rate is 17.75% (15% + 2.75%). Below the NIIT threshold ($200K/$250K MAGI), the 3.8% NIIT doesn't apply, so mid-income Ohio investors pay just 17.75% combined on long-term gains.

The municipal income tax advantage: capital gains are not subject to city taxes

Ohio has over 700 municipalities that levy local income taxes — including Columbus (2.5%), Cleveland (2.5%), Cincinnati (1.8%), and Akron (2.5%). For investors in major Ohio metros, this raises an obvious question: does the city income tax add another layer on top of the 26.55% combined rate?

The answer is generally no. Under Ohio Revised Code §718, which governs municipal income taxes, the tax base for individual residents consists of qualifying wages (compensation from employment) and net profit from a business or profession.² Capital gains, dividends, and interest from investment portfolios are not "qualifying wages" and are not subject to Ohio municipal income taxes.

This is a meaningful structural advantage over some other high-tax metro areas:

• New York City: levies a 3.876% city income tax on investment income for NYC residents, pushing the combined rate to 38.6%.
• Philadelphia: levies a ~3.75% city wage tax that applies to certain investment income for residents.
• Columbus, Cleveland, Cincinnati: municipal income taxes do not apply to capital gains from investment portfolios. The combined rate stays at 26.55% for investment income regardless of city of residence.

Ohio investors should confirm this treatment with a tax professional for their specific situation — particularly for any gain classified as business income rather than investment income, which may be subject to different municipal rules.

Break-even table: Ohio 26.55% vs. Texas/Florida 23.8%

The following shows estimated annual net benefit of direct indexing for Ohio top-bracket investors vs. investors in no-income-tax states, assuming a 1.5% annual harvest rate and a 0.25% fee premium over a comparable low-cost ETF. Actual harvest rates vary significantly with market conditions.

For 15%-bracket Ohio investors (17.75% combined): at $250K, the net benefit after a 0.25% fee premium is roughly +$41/year — barely positive. At $500K it reaches ~+$81/year. The economics are thin in the mid-bracket at smaller account sizes. If you're in the 15% federal bracket in Ohio, the DI case strengthens considerably above $1M in taxable assets.

See the full direct indexing break-even framework for expanded analysis by bracket and portfolio size.

Columbus: Cardinal Health, AEP, Bath & Body Works, and the Intel New Albany campus

Ohio's state capital is home to a mix of Fortune 500 corporations and a growing tech-sector presence that makes it an underappreciated hub for equity compensation planning.

• Cardinal Health (CAH). Dublin, Ohio-based Cardinal Health is one of the largest healthcare distribution companies in the US (Fortune 25) and a consistent RSU issuer across its senior leadership ranks. CAH equity compensation follows the standard two-phase structure: ordinary income at vest (not DI-offsettable) → long-term appreciation from post-vest shares → LTCG at sale. A CAH-exclusion screen prevents wash-sale contamination when harvesting correlated healthcare-sector losses in a direct-indexed S&P 500 account.
• American Electric Power (AEP). AEP's Columbus headquarters employs thousands of corporate professionals with annual stock compensation including RSU and performance share unit (PSU) grants. Utility equities are income-oriented and often involve dividend reinvestment, which creates ongoing cost-basis complexity alongside a DI program. An advisor managing both DI TLH and AEP equity sales can coordinate wash-sale exposure across dividend reinvestment, vested RSU lots, and the direct-indexed SMA account.
• Bath & Body Works (BBWI). BBWI (formerly L Brands) operates from its Columbus headquarters and issues RSU grants to senior retail and corporate employees. The BBWI stock price has experienced significant volatility since the L Brands spinoff in 2021, creating large embedded gains for long-tenure holders and meaningful embedded losses for recent grant recipients — both of which benefit from coordinated DI planning.
• Abercrombie & Fitch (ANF). A&F's New Albany, Ohio headquarters employs a corporate workforce with RSU-based compensation tied to the company's recent multi-year profitability turnaround. ANF's strong 2022–2024 stock performance means many senior ANF employees hold positions with large embedded gains — a natural fit for DI loss bank coordination as they begin selling vested shares.
• Intel New Albany (INTC). Intel is building one of the largest semiconductor manufacturing facilities in US history in New Albany, Ohio — two fabs spanning ~1,000 acres with 3,000+ direct Intel employees expected at full operation. Intel employees (engineering, manufacturing, and corporate) receive INTC RSU grants as a standard component of compensation. New Albany-based Intel employees will face the same RSU wash-sale planning considerations as Bay Area INTC holders, operating under Ohio's 26.55% combined rate rather than California's 37.1%.
• Bread Financial (BFH). The Columbus-based fintech company (formerly Alliance Data Systems) issues RSU and performance share grants to senior employees. BFH has undergone significant corporate restructuring, creating a complex equity comp situation for long-tenured employees whose cost basis spans multiple pre- and post-restructuring grant cohorts.

Cleveland: KeyBank, Sherwin-Williams, Parker Hannifin, Eaton, and Progressive

The Greater Cleveland metro is home to some of the most consistently meaningful equity compensation programs in the Midwest — across banking, industrials, and insurance.

• Sherwin-Williams (SHW). Sherwin-Williams employs over 4,000 corporate and R&D professionals in its downtown Cleveland headquarters and issues RSU and stock option grants at multiple levels of senior management. SHW has been one of the S&P 500's strongest long-term performers, meaning many Sherwin-Williams employees hold RSU positions with very large embedded gains in their vested lots. The DI role here: build a loss bank in a diversified S&P 500 direct-indexed account alongside SHW lots, then deploy losses to offset gain recognition as the employee sells concentrated SHW shares. See the concentrated stock guide for the loss-engine mechanics.
• Parker Hannifin (PH). Parker Hannifin is a Fortune 250 diversified industrial manufacturer headquartered in Cleveland, employing thousands of engineers and senior executives with annual RSU and stock appreciation rights (SAR) grants. Industrial sector equity compensation includes multi-year performance periods, which create bunched gain recognition in specific vesting years — ideal for pre-positioning a DI loss bank to absorb the concentrated vesting event.
• Eaton Corporation (ETN). Eaton (power management, electrical infrastructure) is headquartered in Dublin, Ireland but maintains its principal North American operations in the Greater Cleveland area. Ohio-resident Eaton employees hold ETN RSU grants with the standard gain deferral and harvest coordination considerations. ETN's shares have appreciated substantially alongside the AI-driven datacenter build-out, creating large embedded gains for longer-tenure Eaton equity comp recipients.
• KeyCorp / KeyBank (KEY). KeyBank, headquartered in downtown Cleveland, is one of the largest regional banks in the US and issues RSU and restricted stock grants to senior managers and executives. Banking equity compensation tends to be heavily tied to interest rate environment performance — periods of rate volatility create significant unrealized loss positions in bank stocks that can be coordinated with direct-indexed S&P 500 gains management.
• Progressive Corporation (PGR). Progressive Insurance (Mayfield Village, just east of Cleveland) is one of the most profitable auto insurers in the US and has been a consistent long-term outperformer, generating substantial embedded gains for senior employees who hold long-tenured PGR RSU positions. Progressive's sustained stock appreciation mirrors the Sherwin-Williams dynamic: employees sitting on large embedded gains in a single stock benefit most from a diversified DI loss bank that enables disciplined partial exits without a concentrated tax hit.

Cincinnati: Procter & Gamble, Fifth Third, Kroger, and Cintas

Cincinnati hosts one of the most concentrated clusters of Fortune 500 company headquarters outside the coasts — and a correspondingly significant equity compensation population.

• Procter & Gamble (PG). P&G is Cincinnati's landmark employer and arguably Ohio's most visible Fortune 50 corporation. P&G's equity compensation program is substantial: RSU grants, stock options, and the Employee Stock Ownership Plan (ESOP) all create complex multi-year cost basis situations for senior P&G employees. P&G's steady, dividend-focused stock performance (unlike the volatility of tech) means employees typically accumulate meaningful positions without dramatic unrealized loss events — making a separate DI account critical for generating TLH alpha alongside PG share sales. A PG-exclusion screen prevents the wash-sale trap.
• Fifth Third Bancorp (FITB). Fifth Third, headquartered in Cincinnati's Queen City Square, issues RSU grants to senior banking employees. Regional bank equity comp often reflects the credit cycle and Fed policy environment more than individual company performance — Fifth Third employees may hold RSU positions that have accumulated significant value over low-rate recovery cycles and then experienced mark-to-market loss in rate-hike environments, creating layered gain/loss situations for DI coordination.
• Kroger (KR). Kroger's Cincinnati headquarters employs thousands of corporate and supply chain executives with RSU programs. Grocery retail equity comp is less glamorous than tech RSUs but no less real — Kroger senior employees accumulate meaningful positions over multi-year tenures, and the company's ongoing competitive dynamics with Amazon/Whole Foods and Walmart make concentrated KR stock exits a regular consideration.
• Cintas Corporation (CTAS). Cintas (Mason, Ohio — a Cincinnati suburb) is a uniform services and business services company with a long track record of strong equity appreciation. Cintas consistently ranks among the best-performing S&P 500 companies over 20-year time horizons, meaning long-tenure Cintas employees often hold positions with very large embedded gains — the exact situation where a DI loss bank adds the most strategic value as part of a coordinated exit plan.

2026 Ohio capital gains deduction: HB 96 provisions for Ohio business sellers

Ohio HB 96 (effective TY2026) introduced two new capital gains deductions that are relevant for Ohio founders and early-stage investors:³

• 100% deduction for Ohio VCOC investments. Capital gains from investments through certified Ohio Venture Capital Operating Companies (VCOCs) are fully deductible from Ohio taxable income. This makes qualifying Ohio startup investments effectively Ohio-tax-free at the state level on the gain — though federal LTCG still applies (or is excluded under §1202 QSBS if applicable).
• 50% deduction for selling an Ohio-headquartered business. Capital gains from selling an ownership interest in an Ohio-headquartered business (not through the VCOC structure) are 50% deductible from Ohio taxable income. For an Ohio founder selling a non-QSBS Ohio company for $5M in gain, this reduces the Ohio state tax from 2.75% × $5M = $137,500 to 2.75% × $2.5M = $68,750 — cutting the Ohio tax bill in half, and reducing the combined rate from 26.55% to 25.175% on the deductible portion.

These deductions apply specifically to Ohio business investments, not to gains from a direct-indexed equity portfolio of S&P 500 stocks. For founders deploying post-exit proceeds into a DI portfolio, the non-QSBS proceeds not covered by the §1202 exclusion are subject to the standard 26.55% Ohio combined rate. See the business founder DI guide for the full post-exit deployment strategy.

California and New York transplants to Ohio

Ohio has experienced meaningful net in-migration from California and New York over the past several years, driven by cost-of-living differentials, remote work, and Intel's New Albany investment announcement drawing engineering talent from Silicon Valley.

• From California (37.1% → 26.55%). A successful California-to-Ohio domicile change saves 10.55 percentage points on capital gains — on a $3M gain event, roughly $316,500 in state tax savings. California's Franchise Tax Board scrutinizes high-income domicile changes aggressively. Ohio domicile must be genuinely established (driver's license, voter registration, principal residence) before gain recognition. An investor who starts DI in California builds a loss bank at 37.1% — those carryforward losses then offset future Ohio gains at 26.55%, still providing meaningful value after the move.
• From New York City (38.6% → 26.55%). The combined rate differential is 12.05 percentage points. New York's 183-day statutory residency test (183+ days in New York plus a maintained permanent place of abode) can trap investors who retain a New York apartment after nominally relocating. For Ohio-bound New Yorkers, surrendering the NYC apartment or cooperative is as important as registering at the Ohio address.
• Building DI losses before the move. Investors planning a state change within 12–24 months who haven't yet completed domicile change can begin DI in their current high-tax state. Losses harvested at 37.1% (California) carry forward and offset Ohio gains at 26.55% after the move — starting DI early in the high-tax state maximizes loss bank value per harvested dollar.

QSBS in Ohio: rolling conformity with OBBBA caveats

Ohio uses rolling IRC conformity — the state generally follows the current Internal Revenue Code as amended. This means the federal §1202 QSBS exclusion is generally effective at the Ohio state level for qualifying gains: an Ohio-resident founder selling qualifying QSBS stock should generally also exclude the federally-excluded gain from Ohio state income tax.⁴

Under OBBBA (2025), qualifying QSBS held for at least five years now excludes 100% of gain up to $15 million per issuer federally (up from the $10M cap under prior law). Ohio's rolling conformity generally means this enhanced exclusion carries through to the state level for Ohio residents — meaningfully different from California, which does not conform to §1202 and taxes the full QSBS gain at 13.3%.

However, OBBBA made wide-ranging IRC changes, and states with rolling conformity may have decoupled from specific provisions. Ohio investors with significant QSBS positions should confirm current §1202 Ohio conformity with an Ohio-licensed CPA before relying on state exclusion for their specific tax year and issuer.

Ohio HB 96's new VCOC capital gains deduction and the Ohio business sale 50% deduction may interact with §1202 in complex ways for Ohio-headquartered QSBS issuers. Tax professional coordination is warranted for any large QSBS exit in Ohio.

No Ohio estate tax: §1014 step-up plays cleanly

Ohio abolished its state estate tax on January 1, 2013.⁵ There is no Ohio state estate tax, no Ohio inheritance tax, and no Ohio gift tax. The federal estate tax exemption of $15 million per person (permanently raised by OBBBA, 2025) with full spousal portability applies — for a married Ohio couple, the combined federal exemption is $30 million.

The absence of a state estate tax simplifies the DI step-up strategy considerably:

• Harvest losses from underwater DI lots throughout life — carryforwards offset RSU sale gains, concentrated stock exits at Sherwin-Williams or P&G, and K-1 income events
• Let DI winners run unrealized, compounding without annual drag
• At death, all unrealized appreciation in the DI account resets to fair market value under IRC §1014 — decades of embedded gain permanently eliminated with zero Ohio state tax consequence
• No Ohio estate tax threshold to manage around (unlike Massachusetts at $2M, Minnesota at $3M, or Maryland at $5M)

See the estate planning and §1014 guide for the full mechanics, DAF gifting from appreciated DI lots, and OBBBA permanent exemption context.

Platform selection for Ohio investors

All major direct indexing platforms serve Ohio investors through their advisor networks. Key considerations by asset level:

• Parametric Portfolio Associates (~$250K+ minimum, advisor-only): the primary platform for Ohio industrials, banking, and Fortune 500 equity compensation executives with multi-account wash-sale complexity. Parametric's cross-account wash-sale monitoring and advisor-coordinated model handles SHW, PH, ETN, and PGR RSU vesting calendars well. All-in cost at $1M+ typically 1.0–1.35%.
• Vanguard Personalized Indexing (VPI) (~$250K minimum, 0.20% platform fee): cost-efficient advisor-tier option for Ohio investors in the $250K–$2M range. See the VPI review.
• BlackRock Aperio ($1M+ minimum, advisor-only): adds deep ESG screening for Ohio investors who want to screen, say, automotive or chemicals sector exposure at the revenue-source level. See the Aperio review.
• JPMorgan TACS (~$250K minimum, ~0.23% under $1M): viable for Ohio investors with Chase Private Client or JPMAM relationships, particularly relevant given JPMorgan's large Columbus operations. See the JPMorgan DI review.
• Goldman Sachs TACS (~$250K minimum, ~0.20% fee): strong option for UHNW Ohio investors, particularly given GS's advisor-tier relationships in the financial services community. See the Goldman Sachs DI review.
• Schwab Personalized Indexing ($100K minimum, 0.40% fee): accessible self-serve entry for Ohio investors in the top 23.8% federal bracket with $250K–$1M in taxable and simple tax situations. At 26.55% combined, the net benefit is clearly positive at $500K+. See the Schwab SPI review.
• Wealthfront ($100K minimum, 0.25% all-in): cost-competitive self-serve option for Ohio investors without multi-account complexity. At Ohio's 26.55% combined rate, Wealthfront's lower fee tier means break-even occurs at a lower portfolio size than Schwab. See the Wealthfront DI review.
• Altruist Personalized Indexing ($2,000 minimum, no added platform fee): emerging option for Ohio investors at $50K–$250K, through Altruist-custodied RIAs. See the Altruist review.
• Frec ($20K minimum, 0.09% fee): best low-cost option for Ohio investors at $150K–$500K who want direct self-service DI with minimal fee drag. See the Frec review.

Sources

1. Ohio LSC — HB 96 Tax Bill Analysis (136th General Assembly). Ohio HB 96 (FY2026–2027 state budget) established a flat 2.75% income tax rate on all Ohio income above $26,050 for tax year 2026, collapsing the prior progressive bracket structure. Ohio provides no preferential capital gains rate — long-term and short-term capital gains are both taxed at 2.75% above the $26,050 zero bracket. Cross-verified via taxopilot.com Ohio 2026 Tax Calculator, Tax Foundation 2026 Ohio Tax Rankings, and nationaltaxreports.com Ohio Capital Gains Tax 2026.
2. Ohio Revised Code §718.01 — Municipal Income Tax. Ohio municipal income taxes are authorized under ORC §718 and apply to "qualifying wages" (compensation from employment) and net profit from a business or profession for individual taxpayers. Capital gains, dividends, and interest from investment portfolios are not qualifying wages and are generally not subject to Ohio municipal income tax. Columbus city tax rate of 2.5%, Cleveland 2.5%, Cincinnati 1.8%, and Akron 2.5% apply to qualifying wages earned within those municipalities — not to investment income realized through brokerage accounts. Verified via RITA (Regional Income Tax Agency) Tax Rates Table and Ohio Department of Taxation municipal income tax guidance. Confirm with a tax professional for income structures with business income components.
3. Ohio Society of CPAs — Ohio Introduces New Capital Gains Deductions for Business Owners and Investors (Feb 2026). Ohio HB 96 created two new capital gains deductions effective TY2026: (1) 100% deduction for gains from certified Ohio Venture Capital Operating Companies (VCOCs); and (2) 50% deduction for gains from selling an ownership interest in an Ohio-headquartered business. These deductions apply to qualifying Ohio business investment income, not to capital gains from publicly-traded investment portfolios (direct-indexed equity SMAs).
4. Keystone Global Partners — QSBS State Tax Treatment: State Conformity Guide. Ohio uses rolling IRC conformity and generally follows the federal §1202 QSBS exclusion at the state level. Under OBBBA (2025), the federal §1202 exclusion was expanded to $15M per issuer with tiered 50/75/100% exclusion at 3/4/5-year holding periods. Ohio investors with significant QSBS positions should confirm current §1202 Ohio conformity with an Ohio-licensed CPA given OBBBA complexity. Cross-verified via unclekam.com QSBS 2026 tax guide and millancpa.com §1202 state conformity analysis.
5. Tax Foundation — Does Your State Have an Estate or Inheritance Tax? (2026). Ohio abolished its state estate tax effective January 1, 2013. There is no Ohio estate tax, inheritance tax, or gift tax. The federal estate tax exemption of $15 million per person (permanently raised by OBBBA, 2025) applies — combined spousal exemption of $30 million covers the vast majority of Ohio estates. Cross-verified via estatetaxbystate.com Ohio and ohioestateplanning.com.
6. IRS Rev. Proc. 2025-32 — 2026 Inflation Adjustments. Federal LTCG thresholds for 2026: 20% rate applies at $545,500 (single) / $613,700 (MFJ). 15% rate applies between $47,025–$545,500 (single) / $94,050–$613,700 (MFJ). 0% rate below $47,025 (single) / $94,050 (MFJ). NIIT threshold: $200,000 (single) / $250,000 (MFJ) — not inflation-adjusted. Combined 23.8% rate = 20% federal LTCG + 3.8% NIIT for top-bracket investors.

Ohio income tax rate (2.75% flat above $26,050) verified via Ohio HB 96 LSC analysis and Tax Foundation 2026 Ohio Tax Rankings. Ohio municipal income tax treatment of capital gains verified via ORC §718 and RITA guidance. Federal LTCG thresholds per IRS Rev. Proc. 2025-32 for tax year 2026. OBBBA provisions reflect federal law enacted July 2025. Ohio QSBS conformity stated as general rolling conformity — verify with an Ohio-licensed CPA for your specific tax year given OBBBA complexity. Harvest rate estimates (1.5%/year) are based on industry research and may vary significantly with market conditions and portfolio characteristics. This page is informational only and does not constitute financial, tax, or legal advice.