OBBBA State Tax Conformity | What Individuals in Ohio, Indiana, and Kentucky Need to Know
Published on by Cheryl Ganim in State Local Tax, Tax Services
- Federal tax breaks don’t always mean state savings. New OBBBA deductions for tips, overtime, vehicle loan interest, and other expenses may receive different treatment on state returns.
- Indiana offers temporary tax relief. The state allows deductions for qualified tips, overtime, and vehicle loan interest for 2026 only.
- Kentucky rejects several federal deductions. Taxpayers generally cannot claim OBBBA’s new deductions for tips, overtime, or vehicle loan interest on their Kentucky returns.
- Ohio generally follows federal changes. However, business owners and pass-through investors may face differences in state tax treatment.
- Proactive planning can prevent surprises. Reviewing state-specific rules and adjusting withholding or estimated payments can help taxpayers avoid unexpected liabilities and penalties.
The One Big Beautiful Bill Act (OBBBA) created several new federal tax breaks for individuals. But a deduction that lowers your federal tax bill won’t necessarily lower your state tax bill. States are passing their own legislation to either conform to or reject the federal changes, and they may do so in different years.
What OBBBA individual provisions have the most significant state conformity impact on 2026 tax returns?
- Increased the federal state and local tax (SALT) deduction limitation
- Deduction for Qualified Tip Income
- Deduction for qualifying overtime compensation
- The deduction for qualified vehicle loan interest
- Enhanced tax benefits for seniors
Where does Indiana land on OBBBA’s new federal deductions for individuals?
Indiana does not conform to OBBBA’s new federal deductions, but it has created its own temporary state deductions for 2026:
- Tip income: Indiana allows a state deduction for qualified tips deducted under IRC § 224, for tax year 2026 only.
- Indiana allows a state deduction for qualified overtime deducted under IRC § 225, for tax year 2026 only.
- Vehicle loan interest: Indiana allows a state deduction for qualified passenger vehicle loan interest, for tax year 2026 only.
- SALT cap increase: Indiana does not allow federal standard or itemized deductions, so OBBBA’s changes to those deductions generally do not apply.
Where is Kentucky standing on OBBBA’s new federal deductions for individuals?
Kentucky’s HB 757 specifically decoupled from the individual federal deductions for:
- Tip income deduction
- Overtime deduction
- Qualified vehicle loan interest deduction
- SALT cap increase. Kentucky does not conform to the OBBBA SALT cap increase.
- Mortgage interest. Kentucky limits qualified residence interest to interest on the taxpayer’s principal residence.
What about business interest for individuals in the Bluegrass State?
Individuals with business interest expense subject to IRC § 163(j) (such as sole proprietors and pass-through owners) follow the post-OBBBA federal limitation rules for tax years beginning on or after January 1, 2026. That includes the revised adjusted taxable income calculation, which adds back depreciation, amortization, and depletion when computing the 30% limitation. For tax year 2025, however, Kentucky did not conform to the OBBBA § 163(j) changes because its conformity date was still December 31, 2024. Corporations remain on the pre-OBBBA rules.
And what’s Ohio’s stance on the OBBBA federal deductions?
The Ohio Department of Taxation has not identified broad state-level decoupling from OBBBA’s individual tax provisions. Ohio targeted decoupling primarily related to business bonus depreciation and certain expensing provisions, which can still affect individuals who own businesses or pass-through interests.
What should I do next to ensure I’m in compliance and optimizing my state tax situation?
Three simple steps.
- Check your state’s treatment. Monitor how your state treats the new federal deductions for residence and vehicle interest, tips, and overtime.
- Expect differences. State decoupling can make state taxable income higher than federal taxable income.
- Plan withholding and estimates. Modeling the state addbacks now helps avoid underpayment penalties and year-end surprises.
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Have questions about the OBBBA and state tax conformity? Our team of top sales tax compliance and consulting pros is standing by and here to help. Contact us today for a free consultation.
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