Determining State Residency for Income Tax Purposes

“How do I change my residency for state income tax purposes?” This is a common question that comes up at least several times during tax season. Sometimes clients get concerned about how much they are paying in state income taxes and start to think about establishing residency in a state that does not have state income taxes.[1] Occasionally, they might discuss taxes with their neighbors who have a second home in Florida who tell them to move to Florida full time because there is no income tax. What do you say to those clients who wish to establish residency in another state? You tell them that they must first establish domicile in the state that they wish to move to.

What does domicile mean? Domicile simply means the location of your permanent home or principal establishment and the residence you intend to return to after travel. In other words, domicile means where you spend most of your time and the place where you have a substantial connection. For Ohio, you are considered a resident for income tax purposes if you are domiciled in Ohio. 

Think about the following items, all of which are factors to help determine your domicile:

• Voter registration
• Vehicle registration
• State where you have your driver’s license
• Location of your bank
• Location of your legal and medical professionals
• Location of any business that you own and operate
• Contact periods with a state
• Location of your property
• Your address on important documents, such as wills and trusts, passports and insurance policies

If you want to change your residency from Ohio to another state, you will need to change most of the above to the new state that you want to become a resident in during the tax year.

For tax years prior to 2018, Ohio had an irrebuttable presumption that you were not a resident as long as you did not have 212 contact periods with Ohio and also maintained another home in a state outside of Ohio. A person has a contact period with the state of Ohio when the individual is away overnight from their primary residence located outside of Ohio, and while away overnight from that home, spends at least some portion of two consecutive days in Ohio. To change their residency status, a taxpayer must complete a nonresident affidavit and confirm by filing the affidavit that they had no more than 212 contact periods for a year and therefore were presumed to be non-Ohio residents during the year. However, some taxpayers took advantage of this irrebuttable presumption, see Cunningham v. Testa 2015[2], and on June 28, 2018 Ohio passed House Bill 292, which changed the way that Ohio views a resident.  

As a result of House Bill 292, for tax years beginning in 2018, Ohio will consider you a nonresident if you meet all of the following requirements:

1. During the tax year, you had no more than 212 contact periods in Ohio.
2. During the tax year, you had at least one home outside of Ohio for which you did not claim a depreciation deduction.
3. During the taxable year, you did not hold a valid Ohio driver’s license or Ohio state identification card at any time.
4. You did not receive the Ohio homestead property tax exemption or the owner-occupancy tax reduction with respect to a tax lien date included in the tax year.
5. You did not receive resident tuition benefits for an Ohio institution of higher education based on a residence located in Ohio.

If your clients can meet the above five requirements, they will be considered a nonresident of Ohio for income taxation. 

Pennsylvania

Individuals who are domiciled in Pennsylvania or who are statutory residents of Pennsylvania are subject to Pennsylvania personal income tax on income, regardless of where the income was earned. Pennsylvania defines domicile as the place in which an individual maintains a permanent abode and to which he or she intends to return whenever absent. A person may only have one domicile at any one time. 

The domicile of a Pennsylvania individual who has more than one abode is determined by two factors: (1) the one place where the individual has had the greatest connections during the taxable year; and (2) the place does the individual intend to be his or her domicile. In Pennsylvania’s brochure for determining residency, they list the following examples to help determine where the person has the greatest connections:

• Spends the greatest amount of time
• Supports a spouse and children
• Purchases the necessities of life
• Has doctors, lawyers and accountants
• Houses pets
• Has active banking accounts
• Worships regularly
• Participates in social, fraternal or athletic organizations
• Has works of art, furniture, family portraits or heirlooms

Thus, Ohio and Pennsylvania have fairly similar definitions of residency.  It all comes down to domicile. Changing domicile requires planning so that you can meet the factors listed above to determine where you reside for state tax purposes. Additionally, in the past couple of years, Ohio has been increasing their audit activity for taxpayers who were once Ohio residents and then became nonresidents. If you are thinking of changing your residence to a state with no income taxation, consult your Schneider Down tax professional.  They can help you make this important decision.

[1] Seven states do not have an income tax:  Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.  Tennessee and New Hampshire also do not have an income tax, but they do tax interest and dividend income.

[2] Cunningham v. Testa, 144 Ohio St. 3d 40 - 2015

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