Plan on Ohio: Ohio's new Bright-Line Residency Test adds simplicity and opportunities.
Tax practitioners should immediately review the potential impact of the 2007 Bright-Line Residency Test with any clients who already have a residence outside Ohio to determine whether they may benefit from the new bright-line test for taxable year 2007. In addition, current nonresidents of Ohio should be advised about the increased contact periods and additional reporting requirements of the 2007 Bright-Line Residency Test.
A review of Ohio's historical treatment of domicile and residency for income tax purposes is necessary to understand the 2007 Bright-Line Residency Test.
Ohio's personal income tax is imposed on individuals who reside, earn or receive income in Ohio. Individuals who reside in Ohio are taxed differently from nonresidents who merely earn or receive income in Ohio. In general, residents are taxed on their income from all sources, with a tax credit for income taxed by other states. Nonresidents are initially taxed on their income from all sources, but get a full tax credit for income not earned or received in Ohio, regardless of whether the nonresident paid income tax to another state. Because nonresidents pay Ohio tax only on their Ohio-sourced income, many Ohioans save Ohio taxes by establishing residency in a state either with a lower combined income tax rate than Ohio, which is most other states, or with no income tax at all (e.g., Florida, Nevada and Texas).
Changing one's residence from Ohio to another state was traditionally a rather complicated and confusing task. A person is considered an Ohio resident if "domiciled" in Ohio. A taxpayer's domicile is a permanent legal residence that the taxpayer intends to use for an indefinite or unlimited period, and to which, when absent, the taxpayer intends to return. The question of domicile is primarily a matter of intent. Historically, the Ohio Department of Taxation (ODT) and the courts have used a myriad of factors to measure this subjective standard of intent. Just a few of the factors that they have historically used to determine residency include:
* State of voter registration
* State of motor vehicle registration
* State of driver's license
* IRS service center used to file federal tax returns
* Location of bank accounts and lines of credit
* Location of major consumer goods purchases
* Location of professional service providers, such as attorneys, accountants and physicians
* Location of charitable organizations supported by the taxpayer
* Location of athletic and social club memberships.
The use of these and many other factors did not reduce the subjectivity of the residency determination.
Confusion before 1993
Due to this subjectivity, a persistent area of controversy between ODT and individual taxpayers was the question of an individual's residency status for Ohio personal income tax purposes. ODT spent significant audit resources in attempting to identify individuals who were avoiding Ohio income tax by improperly treating themselves as residents of another state. At the same time, individuals spent significant resources proving their bona fide change in residency. The resulting litigation created increasing uncertainty for both ODT and individuals.
To reduce the uncertainty of residency status, ODT, The Ohio Society of CPAs and the Ohio State Bar Association collaborated to develop a bright-line test of residency. The result of this joint effort was S.B. 123, referred to as the 1993 Bright-Line Residency Tests, which provided three "bright-line" tests to determine residency for Ohio individual income tax purposes.
The 1993 Bright-Line Residency Tests
The 1993 Bright-Line Residency Tests did not change prior law, but attempted to avoid subjectivity by providing three bright-line tests for purposes of determining residency for Ohio personal income tax purposes. That law applied to all taxable years ending on or after Oct. 29, 1993. The bright-line tests were based on the number of contact periods an individual had in Ohio. Individuals were considered having one contact period in Ohio if:
1) They had an abode located outside Ohio
2) They were away from that abode for a continuous period of time, however minimal, beginning at any time on one day and ending at any time on the next day (i.e., away overnight)
3) While away overnight from that abode, they spent at least some portion of two consecutive days in Ohio.
The three bright-line tests were as follows:
* The 120 Contact Periods or Fewer Test: Under this test, an individual was presumed not to be domiciled in Ohio if the individual had 120 contact periods or fewer in Ohio during the taxable year and had at least one abode outside Ohio for the entire taxable year. The presumption would become irrebuttable if, upon request of the tax commissioner, the individual timely provided a written statement, signed under penalties of perjury, representing that she had at least one place of abode located outside Ohio during the entire taxable year and that she was not domiciled in Ohio for any period during the taxable year.
* The 121 through 182 Contact Periods Test: Under this test, an individual was presumed to be domiciled in Ohio for the entire taxable year if she had more than 120 contact periods in Ohio, but fewer than 183, during the taxable year. However, the individual could rebut this presumption for all or any portion of the taxable year by providing a preponderance of evidence to the contrary.
* The 183 Contact Periods or More Test: Under this test, an individual was presumed to be domiciled in Ohio for the entire taxable year if she had 183 or more contact periods in Ohio during the taxable year. However, the individual could rebut this presumption for all or any portion of the taxable year by providing clear and convincing evidence to the contrary.
In 2000, Ohio added an additional 30 "free" contact periods (these are "contact periods" but are not considered as such for the aforementioned tests) if the individual spent any portion of either day of such contact period to provide services for no consideration to a charitable organization, to attend to a medical hardship of the individual or a relative, or to attend a funeral for a family member.
The 1993 Bright-Line Residency Tests provided some certainty for many individuals, especially to those who had 120 or fewer contact periods. However, for those who exceeded 120 contact periods, no true level of certainty or comfort existed and few taxpayers challenged the residency presumption of the second or third test. As a result, many former Ohioans who retired to warmer climates avoided extended stays in their native Ohio. Many policy makers and community leaders felt this situation deprived Ohio of the significant resources and benefits that these native Buckeyes could offer our state.
The New 2007 Bright-Line Residency Test
Ohio's new 2007 Bright-Line Residency Test provides more flexibility for current and former Ohioans, but it also adds new mandatory reporting requirements. The 2007 Bright-Line Residency Test law removes the three tests described above and provides what is essentially an "all or nothing" test for determining whether an individual is a nonresident for Ohio tax purposes. The likely result of the law change is that some taxpayers who have continued to pay income tax as Ohio residents may now be considered nonresidents for Ohio tax purposes. Further, current nonresidents may now be able to increase their Ohio connections with no adverse Ohio income tax impact.
The 2007 Bright-Line Residency Test retains the same definition for "contact period" as contained in the 1993 Bright-Line Residency Tests. An individual has one contact period with Ohio if, while away overnight from their non-Ohio abode, the person spends at least some portion of two consecutive days in Ohio.
* Example 1: If Mickie, who lives in Maine, flies into Dayton International Airport on May 1 for a meeting and flies out of Dayton and back to Maine on May 2, her visit will constitute one contact period in Ohio. Note that the ODT would undoubtedly count one contact period against Mickie even if her meeting was in Richmond, Indiana, and she spent the night in Indiana.
The total number of contact periods in Ohio does not have to be consecutive.
* Example 2: If Alison, who lives in New York, stays in Ohio from May 1 through July 31 (91 contact periods) and also the entire month of December (30 contact periods), she will have 121 contact periods in Ohio for the taxable year.
The 2007 Bright-Line Residency Test provides that an individual will be presumed to be not domiciled in Ohio, and therefore not an Ohio resident, if all the following are satisfied:
1) The individual has no more than 182 contact periods in Ohio during the taxable year
2) The individual has at least one abode outside Ohio during the entire taxable year
3) On or before the 15th day of the fourth month following the end of the taxable year (April 15 for most individuals), the individual submits a statement, under penalties of perjury, to the tax commissioner verifying that he/she was not domiciled in Ohio for the entire taxable year, verifying that he/she had at least one abode outside Ohio, and specifying the location of each of his/her non-Ohio abodes
4) The required statement is not false.
The 2007 Bright-Line Residency Test's increase in protected contact periods creates important tax planning opportunities for Ohio residents.
* Example 3: Loretta lives in Xenia, Ohio and is ready to retire. She has a sizeable investment portfolio. Loretta also owns a cottage in Florida, where she plans to reside for six months of each year. Loretta will spend the other six months in Ohio where she will visit her family and grandchildren. Under the 1993 Bright-Line Residency Tests, Loretta would be presumed to be an Ohio resident and, unless she successfully challenged the presumption, would owe Ohio income tax on the interest, dividends and capital gains generated by her retirement nest egg. However, under the 2007 Bright-Line Residency Test, Loretta could be treated as a nonresident and, thereby avoid owing Ohio income tax on these amounts.
The 2007 Bright-Line Residency Test also benefits Ohio and its communities by permitting nonresidents to increase their presence and activities in Ohio.
* Example 4: Kim is a native Ohioan who, prior to retiring to her abode in Florida, was an influential business and community leader in Cleveland. After retirement, Kim limited her activities in Cleveland so that she could qualify as a nonresident under the 1993 Bright-Line Residency Tests. As a result, Cleveland lost the benefit of her community leadership and philanthropy. Now, under the 2007 Bright-Line Residency Test, Kim may spend more time in Cleveland working on important community causes without jeopardizing her nonresident status.
The presumption of nonresidency is irrebuttable unless the individual fails to timely file the required statement described above with the tax commissioner or makes a false statement. The tax commissioner will issue a form on which to make the statement, but an income tax return filing extension does not extend the due date for filing this statement. If an individual dies prior to the date the required statement is due, the personal representative of the estate of the deceased individual may file the statement by the later of the date the statement would usually be due or within 60 days of the individual's death. In any case, the individual or personal representative will be guilty of perjury if either knowingly makes a false statement.
The tax commissioner has authority to challenge the number of contact periods an individual claims to have had in Ohio. If challenged, an individual must prove the number of contact periods she had with Ohio by a preponderance of the evidence. Ohio Jurisprudence defines "preponderance of evidence" to mean "that after the testimony of all the witnesses has been weighed, with reference to their credibility, exactness of memory, and all the circumstances surrounding their testimony, the evidence of one side outweighs that of the other." Although written records are not required, this burden means that taxpayers should keep careful records that show the number of contact periods in Ohio. Such records might include personal diaries, personal and business calendars, travel itineraries and receipts, payroll records, voting and other public records, and other written documents.
An individual who has less than 183 contact periods in Ohio during a taxable year, but does not meet the other requirements of the bright-line test, is presumed to be a resident of Ohio. The individual can rebut this residency presumption by a preponderance of the evidence.
* Example 5: Rosie is a former Ohioan who now resides in Florida. Historically, she has limited herself to no more than 120 contact periods in Ohio. During 2007, Rosie also has no more than 120 contact periods in Ohio. However, she fails to file the required statement with the tax commissioner by April 15, 2008. Because of this error, Rosie is presumed to be a resident of Ohio and will now have to show by a preponderance of the evidence that she is not an Ohio resident.
An individual who has 183 or more contact periods in Ohio during a taxable year is also presumed to be an Ohio resident. The individual may rebut this residency presumption only with clear and convincing evidence. Ohio Jurisprudence defines "clear and convincing evidence" to mean that measure or degree of proof that "is more than a mere preponderance of the evidence but less than the certainty required by the 'beyond a reasonable doubt' standard applied in criminal cases ..." and which will "produce in the mind of the trier of facts a firm belief or conviction as to the facts sought to be established."
Tax Commissioner's Rule
The Tax Commissioner's Rule that was adopted after enactment of the 1993 Bright-Line Residency Tests should be amended to reflect the 2007 Bright-Line Residency Test. In the meantime, it is important for taxpayers and tax practitioners to be familiar with the current rule because many of its provision will likely be retained in a new rule. For example, the "preponderance of the evidence" and "clear and convincing evidence" standards discussed in the current rule still have some applicability to rebut the residency presumptions of the 2007 Bright-Line Residency Test.
When reviewing the 2007 Bright-Line Residency Test's applicability to their clients, practitioners should keep in mind some important considerations in addition to those mentioned earlier.
* The 30 "free" contact periods that applied to the 1993 Bright-Line Residency Tests are no longer available under the 2007 Bright-Line Residency Test.
* The nonresidency presumption of the 2007 Bright-Line Residency Test does not apply with respect to an individual who is changing domicile to or from Ohio during the taxable year (i.e., a part-year resident).
* The new law repealed the "election to be a non-resident" provision contained in the 1993 Bright-Line Residency Tests. This provision provided some unusual tax results, as well as some unusual considerations for the taxpayer, based on whether the individual was taxed or not taxed in other states. This repealed election also contained a modification of the resident credit that no longer applies.
* The 2007 Bright-Line Residency Test also helps determine an individual's residency for purposes of the school district income tax. An individual who meets the new Ohio bright-line residency test and who is also domiciled in the school district or lives in and maintains an abode in the school district will be considered a resident of the school district. Therefore, if an individual is not an Ohio resident under the 2007 Bright-Line Residency Test, then the individual will not owe school district income tax even if he/she has an abode in the school district.
* The tax commissioner recently issued Information Release IT 2007-01, "Personal Income Tax: Residency Guidelines--Tax Imposed on Resident and Nonresident Individuals--Issued January 2007". However, that Information Release does not apply with respect to the 2007 Bright-Line Residency Test for taxable years beginning on or after Jan. 1.
The 2007 Bright-Line Residency Test adds simplicity to the determination of whether an individual is a nonresident of Ohio, creating significant opportunities for both current and former Ohioans. Current Ohioans who have a home in another state could reduce or eliminate their Ohio taxes, while former Ohioans could become more active in Ohio without increasing their Ohio taxes.
Thomas M. Zaino, CPA, JD served as Ohio Tax Commissioner from 1999 to 2003. He is currently managing partner of McDonald Hopkins LLC's Columbus law office.
Stephen K. Hall JD, LL.M was previously the Assistant Counsel at the Ohio Department of Taxation. He is currently an attorney with McDonald Hopkins LLC's Multistate Tax Practice Group.
Sub. H.B. 73, 126th General Assembly (2006).
It is important to note that nonresidency status does not relieve the individual from paying Ohio income tax on income earned in Ohio. Examples of such income are (i) compensation earned in Ohio, and (ii) distributive shares of income and gain from pass-through entities doing business in and having nexus with Ohio.
Ohio Revised Code ("R.C.") 5747.02(A). The personal income tax is also imposed on estates and certain trusts, but the 2007 Bright-Line Residency Test does not directly impact the taxation of estates or trusts in Ohio.
"Combined tax rate" refers to the highest marginal rate after combining personal income tax, municipal income tax and school district income tax.
To avoid the ambiguity of using gender neutral terms, the female gender is used throughout this article to refer to individuals. The authors do this for ease of reading (and to honor the women in their life).
Davis v Limbach, Ohio Board of Tax Appeals, Case No. 89-C-267 (September 25, 1992).
Because domicile directly determines residency for Ohio personal income tax purposes, the terms "domicile" and "residency" are often used interchangeably from this point on in the article.
"Ohio's New Bright-Line Residency Tests: A New Approach," Thomas M. Zaino, CPA, JD, Ohio CPA Journal, February 1994.
S.B. 123, 120th General Assembly, 1993.
Former R.C. 5747.24(A)(1)(a) and (b).
Former R.C. 5747.24(B).
Former R.C. 5747.24(C).
Former R.C. 5747.24(D)
Former R.C. 5747.24(A)(2).
Query: What if Mickie owned a second abode in Richmond, Indiana? The law does not define "abode" and Mickie would not technically be away overnight from her non-Ohio abode.
It is interesting to note that, if read literally, the statute would require an individual that never set foot in Ohio to file this statement in order to be presumed a nonresident. This result is silly (and probably unconstitutional). See Tyson v. Zaino, Ohio Board of Tax Appeals, Case No. 2001-B-1327 (October 3, 2003) ("In order to reside in a state, one must have a place of abode. Columbus v. Firebaugh (1983), 8 Ohio App.3d 366").
Id. Note that the 2007 Bright-Line Residency Test does not currently provide an extended due date for filing the required statement.
44 Oh. Jur. 3d, Evidence and Witnesses, section 951 (2006).
Ohio Administrative Code section 5703-7-16.
44 Oh. Jur. 3d, Evidence and Witnesses, section 955 (2006).
Ohio Administrative Code section 5703-7-16.
See former R.C. 5747.25.
By Thomas M. Zaino, CPA, JD and Stephen K. Hall, JD, LL.M McDonald Hopkins LLC
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|Author:||Zaino, Thomas M.; Hall, Stephen K.; Hopkins, McDonald|
|Publication:||Catalyst (Dublin, Ohio)|
|Date:||Mar 1, 2007|
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