As the filing deadline for Ohio income tax nears, taxpayers who own multiple homes — at least one inside Ohio and at least one outside Ohio — should consider whether to assert that they are not Ohio residents for Ohio income tax purposes based on Ohio’s “bright line” statute.
Owners may now spend 30 days more per year in Ohio and still be taxed as a non-resident. A nonresident of Ohio pays Ohio income tax only on income that is earned in Ohio, while Ohio residents must pay Ohio income tax on all of their taxable income, including retirement income and investment income.
Note that the “bright line” residency test applies only for Ohio’s state and school district income tax. It does not determine residency for Ohio municipal income tax purposes. A person can be a “bright line” non-resident for Ohio income tax purposes but still be a resident of an Ohio municipality for municipal income tax purposes.
A recent change in Ohio’s “bright line” income tax residency statute was intended to allow more people to qualify as non-Ohio residents for Ohio income tax purposes. But, the Ohio Department of Taxation is taking audit and litigation positions that, unless overturned by the Ohio Supreme Court, may make it more difficult for taxpayers to be classified as non-residents of Ohio under the bright line test.
The “bright line” residency statute says that a taxpayer is to be treated as a non-Ohio resident for Ohio income tax purposes if the taxpayer meets all of the following requirements:
- The taxpayer had at least one “abode” (home) outside of Ohio for the entire tax year.
- The taxpayer did not move into or out of Ohio during the year. Taxpayers who do this are part year residents of Ohio.
- The taxpayer had no more than a certain number of “contact periods” (basically, overnight stays) in Ohio during the tax year. For tax years up to 2014, the maximum number of contact periods was 182. A recently enacted change increases this maximum number of contact periods to 212 days effective with tax year 2015.
- Finally, and very importantly, a taxpayer must file an Ohio Tax Form IT DA-NM (for non-military taxpayers) with the Ohio Department of Taxation no later than June 1 of the year following the tax year for which non-Ohio income tax residency is claimed. (The form also must not contain a “false statement,” which we discuss below.) Thus, a taxpayer wishing to claim bright-line non-Ohio residency for income tax purposes must file this form by June 1, 2015 to claim bright line non-residency for purposes of income earned in 2014. A taxpayer who meets all of the other qualifications, but who does not timely file the Form IT DA-NM form (or whose form contains a “false statement”), is presumed to be a resident for Ohio income tax purposes, and may be taxed as an Ohio resident unless he or she can prove “domicile” outside of Ohio. If a taxpayer has a home in Ohio, the Department of Taxation may consider it the taxpayer’s domicile unless the taxpayer shows either that the Ohio home was never his or her principal place of residence or that the taxpayer has established a new principal place of residence outside of Ohio. A variety of factors, such as voting registration, where automobiles are registered, and the taxpayer’s mailing address, are considered in determining, on a case by case basis, whether an Ohio versus a non-Ohio home is the taxpayer’s domicile.
A taxpayer who meets the first three qualifications for “bright line” residency should consider filing the Form IT DA-NM if the taxpayer has pension, dividend, or interest income or has income earned outside of Ohio. Ohio’s “bright line” test does not determine whether another state will tax this income, but it does determine whether Ohio may tax it. And, while there is pending litigation (discussed below) that in effect challenges whether Ohio really has a “bright line” non-residency presumption, this pending litigation should not discourage a taxpayer who meets the other requirements from filing the form IT DA-NM. If the litigation is resolved in the taxpayer’s favor, filing the form along with meeting the other requirements will assure that the taxpayer’s income that was not earned in Ohio will not be subject to Ohio’s state income tax. If the taxpayer loses, the filing of the form will have made little difference.
A case pending at the Ohio Supreme Court shows that meeting the other qualifications and timely filing the Form IT DA-NM may not guarantee that the Ohio Department of Taxation will recognize the taxpayer as a non-Ohio resident. For years, the Ohio Department of Taxation has assessed some taxpayers who felt that they had met all of the requirements for “bright line” income tax residency as Ohio residents. Most of these cases have settled, but the Department of Taxation has forced one taxpayer to argue before the Ohio Supreme Court that he is not a resident of Ohio for income tax purposes because he meets all of the “bright line” requirements. The taxing authorities, however, have argued that the taxpayer made a false statement on his IT DA-NM because the form requires him to state that he was not domiciled in Ohio for the year, even though the department feels that his common law domicile was and remains in Ohio. The taxpayer once had only the Ohio home, and later bought the out-of-state home, but still voted in Ohio, had his car registered in Ohio, and listed the Ohio address on his federal income tax return. Unless and until this case is decided in the taxpayer’s favor (oral arguments are in March and a decision is expected later this year), taxpayers are still at risk of being assessed Ohio income tax as residents even if they meet all of the other requirements and timely file the form IT DA-NM.
In short, while the Ohio legislature, in expanding the number of contact periods, is trying to make it easier for taxpayers to qualify as “bright line” non-residents for state income tax purposes, Ohio’s tax auditors are trying to make it more difficult. The pending case will probably not be decided by the June 1 deadline for filing the Form IT DA-NM for income earned in 2014, so taxpayers must decide whether to file it without knowing whether the filing will cause them to be treated as non-Ohio resident by the Ohio income tax auditors. What is certain is that, even if the taxpayer wins the pending case, anyone who does not file the IT DA-NM by June 1 of this year will NOT be presumed to be a non-resident for Ohio income tax purposes. Taxpayers should thus discuss with their attorney or tax preparer whether to file this form and whether to also file an Ohio income tax return.