Change in Ohio Residency Rules

Editor: Anthony S. Bakale, CPA, M.Tax.

There may be a lot more incentive to becoming a resident of a state like Florida than just the weather. While at times the weather may be enough of an incentive, the potential state tax savings can be even greater. Higher-income-tax states like Ohio have found themselves losing residents to states that have no (or low) individual income tax rates (like Florida). Ohio has reacted by changing its residency rules. The expected benefits of this change are twofold: (1) there will be greater certainty as to who is subject to tax and (2) individuals will be able to spend more time in Ohio without jeopardizing out-of-state residency; the more time spent in Ohio, the more dollars nonresidents will spend there.

Before reviewing the details of the changes, it is important to understand Ohio’s individual income tax structure. It does not distinguish between residents and nonresidents the way most states do. Most states determine taxable income for resident taxpayers based on income from all sources, while nonresidents’ taxable income is determined based solely on income derived from within the state. Ohio does not make such a distinction; residents and nonresidents determine Ohio taxable income in exactly the same way.

Ohio starts with Federal adjusted gross income. There may be additions, subtractions and exemptions, but the calculation is the same for both residents and nonresidents. A distinction is made in determining the credit for taxes paid to other states. Residents are only allowed a credit for the portion of their income taxed in another state, while nonresidents are allowed a credit for the portion of their income not attributable to Ohio.

Ohio Revised Code §5747.01(I) defines a resident as any of the following:

1. An individual domiciled in the state;
2. An estate of a decedent who at the time of death was domiciled in the state; or
3. A trust that, in whole or in part, resides in the state.

In determining an individual’s domicile, Ohio looks to the number of contact periods that an individual has with the state. The individual must also have at least one abode outside of Ohio in order not to be domiciled in Ohio.

A contact period occurs when an individual is away overnight from his or her abode located outside of the state and, while away, spends at least some portion (no matter how minimal) of each of two consecutive days in the state. To be considered to be away overnight, the individual must be away from his or her abode located outside the state for a continuous period of time beginning at any time on one day and ending at any time on the next day.

Effective for tax years beginning after 2006, the rules for determining domicile have changed. (Note: These rules do not apply to an individual changing domicile to or from Ohio.)

New Rule

An individual is presumed to be domiciled outside of Ohio (and, thus, a nonresident) for any tax year during which he or she has no more than 182 contact periods in Ohio, provided he or she has at least one abode outside the state and files a statement with the tax commissioner. In the statement, the individual must verify the following:

1. During the entire tax year, he or she was not domiciled in Ohio.
2. During the entire tax year, he or she had at least one abode outside of Ohio. The statement must include the location of the abode located outside of Ohio.

For a calendar-year taxpayer, the statement must be filed by April 15 (or filed on or before the 15th day of the fourth month following the close of the individual’s tax year). If the individual does not file the statement timely or makes a false statement, he or she is presumed to be domiciled in Ohio for the entire tax year.

In addition, any individual with fewer than 183 contact periods in Ohio who does not meet the above requirements, or any individual with at least 183 contact periods in Ohio, is presumed to be domiciled in Ohio for the entire tax year. This presumption can be rebutted, but it is the individual’s burden to provide evidence to the contrary.

There are some points worth noting:

1. The contact periods with the state do not need to be consecutive.
2. As it stands currently, the statement must be filed by April 15 for calendar-year taxpayers. There is no extension of time to file.
3. If an individual dies before the statement is due, the estate representative may file the statement with the commissioner by the later of the statement’s original due date or 60 days after the individual’s date of death.
4. Ohio, like most other states, has a computerized auditing program that checks the addresses listed on the Federal return. Any Federal returns with an Ohio address are then cross-checked to ensure that an Ohio return was filed. If not, the individual may receive an automatic notice of estimated tax due.

Old Rule

Under the old rule, an individual was presumed to be domiciled outside of Ohio for any tax year during which he or she had no more than 120 contact periods with the state, provided he or she had at least one abode outside of Ohio. There was no requirement to file a statement verifying that the individual was domiciled outside the state, although the commissioner had the authority to request such a statement.

Any individual with fewer than 183 contact periods in Ohio who does not meet the requirements above, or any individual with at least 183 contact periods in Ohio, is presumed to be domiciled in Ohio for the entire tax year. This presumption can be rebutted, but it is the individual’s burden to provide evidence to the contrary.

Factors Used to Determine Domicile

Ohio Admin. Code §5703-7-16 provides guidance as to the factors that may be considered in determining domicile if the tax commissioner ever challenges the number of contact periods an individual has claimed. Such support includes (but is not limited to):

1. Credit card or cash receipts;
2. Personal diaries, calendars or ex- pense reports for business travel;
3. Mail forwarding;
4. Transportation tickets or receipts; travel vouchers; logs of airplanes, yachts or other means of transportation;
5. School attendance records;
6. Voting records and other public records; and
7. Armed services records.

The rule also provides several factors that will not be taken into account in determining domicile, including the location of financial institutions and investment facilities in which the individual has accounts or the location of the individual’s physicians, dentists or other healthcare providers.

Effect of Domicile on Trusts and Estates

In addition to an individual income tax, Ohio also imposes an income tax on estates and trusts. To determine the residency of an estate, Ohio generally looks to the domicile of the individual before death, although facts and circumstances may also come into play.

For trusts, the state considers the transfer of assets, whether directly or indirectly, to the trust. The rules for determining the trust’s residency depend on the type of trust involved. For testamentary trusts, the trust resides in Ohio if a person, court or governmental entity or instrumentality transfers assets on account of the death of a decedent who was domiciled in Ohio at death. An irrevocable trust resides in Ohio if the person transferring the assets was domiciled in Ohio when the assets were transferred and at least one of the trust’s qualifying beneficiaries is domiciled in Ohio during all or some portion of the current tax year. A trust whose trust document or instrument or part thereof became irrevocable while the person transferring the assets was domiciled in Ohio resides there, but only if at least one of the trust’s qualifying beneficiaries is a resident domiciled in Ohio during all or some portion of the trust’s current tax year.

Further, Ohio considers a trust to be irrevocable to the extent the transferor is not deemed to be the owner of the trust’s net assets under Secs. 671–678. This fact can be crucial in determining the residency of intentional defective grantor trusts.

Conclusion

It is important for individuals to understand a state’s residency rules and how those rules can affect them. A thorough understanding of the rules can help minimize the effect of various state income taxes when the taxpayer maintains multiple residences. Also, states need to create greater certainty in identifying taxpayers and simplifying their residency rules to provide certainty within their tax systems.