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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."
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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.
Important considerations
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.
Conclusion
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.
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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.
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Endnotes
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.
R.C. 5747.05(B).
R.C. 5747.05(A).
"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).
R.C. 5747.01(I)(1).
Davis v Limbach, Ohio Board of Tax Appeals, Case No. 89-C-267 (September 25, 1992).
Id.
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.
Id.
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).
R.C. 5747.24(A).
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.
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