New Ohio Residency Requirements for Individual Income Tax
On December 19th Governor Kasich signed HB 494 into law, which changes Ohio’s residence requirements for Ohio income tax purposes. The new law impacts the so-called “snowbird rules,” which determine whether or not part-time residents of Ohio are required to pay Ohio income tax. The bill amends Ohio Revised Code §5747.24 with an effective date of March 23, 2015. For tax purposes the change impacts all tax years from 2015 onward. Essentially, the new law increases the number of months a person with a permanent residence outside of Ohio can spend in Ohio, and still not be considered an Ohio resident, from six to seven months.
Importance of Residency Status
The new law makes it easier to not be considered an Ohio resident (i.e., not subject to Ohio income tax). This is significant as an Ohio resident is required to pay income tax on their income earned anywhere in the world (with credits for taxes paid in other jurisdictions). A nonresident, on the other hand, only pays Ohio income tax on income earned or received in Ohio. With Ohio having a top income tax bracket of 5.421% and Florida not having any state income tax, being classified as a non-resident can amount to significant tax savings for a person with a home in Florida (or another state with no or lower income tax).
How is Residency Determined
Our law determines whether an individual is a “resident” based on “domicile.” Under §5747.24, domicile is determined by a so called “bright-line” test. The test involves tracking the number of “contact periods” an individual has with Ohio in any given taxable year (typically a calendar year). One contact period occurs when an individual is away from their primary residence and is in Ohio when the clock goes from 11:59pm to 12:01am. Essentially it is a test of the number of nights spent in Ohio. It is a common misconception that one should count the number of days in Ohio. In fact a person could fly into Ohio for a meeting and out the same day and not have a contact period with Ohio.
Under the previous version of §5747.24 an individual with 182 or fewer contact periods during a taxable year and an abode outside of Ohio for the entire year was conclusively presumed not to be domiciled in Ohio. Likewise, an individual was presumed to be domiciled in Ohio if they had 183 or more contact periods with Ohio. The old law required an individual to complete Ohio Tax Form IT DA-NM on an annual basis verifying the individual was not a resident and indicating their permanent abode. Failure to file that form created a presumption of domicile in Ohio.
New Law: Residency in 2015 and Beyond
The new law increases the number of contacts an individual can have and still be presumed not to be domiciled in Ohio for income tax purposes from 182 to 212. As a result, in order for there to be a presumption that an individual is domiciled in Ohio that individual must have 213 or more contact periods. The new law still requires an annual filing of Ohio Tax Form IT DA-NM. The form for taxable year 2014 was released in January of 2015 and the form for taxable year 2015 is not yet available on the Ohio Department of Taxation website.
Snowbirds and other part-time Ohioans can now spend an additional month in the buckeye state while maintaining a presumption of non-residency for Ohio income tax purposes. For individuals wishing to establish Ohio non-residency there are certain strategies and actions that can be taken to help bolster a case for non-residency. Only certain evidence will be considered by the Tax Commissioner during an audit. There are also several best practices that should be maintained for part-time residents seeking to avoid paying Ohio income tax on income not earned or received in Ohio.
For More Information
If you would like to learn more about establishing non-residency to avoid paying Ohio income tax on non-Ohio income please contact one of the members of the Family Wealth Planning group at Carlile Patchen & Murphy.