Ohio Income Tax: An Individual May Now Spend Up to 7 Months In Ohio, But Still Be Taxed As A Nonresident Under the Bright-Line Residency Test
Qualifying as a nonresident for Ohio income tax purposes, which can significantly reduce tax owed on investment and business income, has gotten easier. Ohio residents are taxed on all their income, subject to a resident credit for income taxed by other states. Conversely, nonresidents are only taxed on their Ohio-sourced income. For a nonresident, pension income, gains from the sale of publicly-traded stock, dividends, interest and certain other intangible / investment income are not subject to Ohio income tax. Moreover, a nonresident owning a small business is only taxed on its business income to the extent apportioned to Ohio. Even an Ohio-based business may have a relatively low apportionment ratio if it has significant sales outside Ohio due to Ohio’s market-based sourcing and triple-weighted sales factor.
The common-law domicile test traditionally determined one’s residency for Ohio income tax purposes. This test focuses on the individual’s subjective intent to remain in Ohio indefinitely and return to Ohio when absent. In 1993, Ohio enacted a bright-line residency test which provided a safe-harbor for individuals who maintain an abode outside Ohio, spent less than a certain number of “contact periods” (essentially, overnight stays) in Ohio and file a particular statement with the Department of Taxation. Originally, the permissible contact periods were 120; in 2007, the bright-line test was increased to 182 contact periods. This provided predictability for individuals maintaining homes both in and outside Ohio, such as “snow-birds” splitting their time between Ohio and more-climate favorable state. However, the more burdensome common-law test still applies to individuals who do not meet the bright-line residency test.
Recently enacted H.B. 494 now allows individuals to have up to 212 Ohio contact periods and still qualify to be taxed as a nonresident for Ohio income tax purposes. To meet the bright-line test, which is irrefutable, the individual must: (1) maintain an abode outside Ohio for the entire year; (2) have no more than 212 Ohio contact periods; and (3) file an Affidavit of Non-Ohio Residency / Domicile (Form IT DA) with the Ohio Department of Taxation by April 15th although this date is typically extended. Filing the required Affidavit is a simple, yet often overlooked, requirement that is absolutely critical. If an individual otherwise meets the bright-line test, but fails to file the affidavit, he/she will be presumed to be an Ohio resident and must meet the common-law test to establish nonresidency. Our previous post discussing Cunningham v. Testa, where a husband and wife were treated as residents of different states, highlights the importance of this Affidavit.
With the proper planning, Ohio’s favorable bright-line residency test allows individuals with multiple homes to spend up to 7 months in Ohio, yet still be taxed as a nonresident. This may provide a significant benefit for individuals with investment / intangible income or income from a small business. It may also provide significant benefits to individuals maintaining abodes in multiple states, including Ohio. If you have questions concerning how to take advantage of Ohio’s favorable bright-line resident test, please contact Steve Dimengo, Rich Fry, or Casey Davis.