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IT 2006-04 - Personal Income Tax: Nonresident Married Filing
Jointly - Issued September 2006
This information release is to advise taxpayers that the Ohio
Department of Taxation (ODT) is planning on filing a proposed
rule, Ohio Administrative Code 5703-7-18, to address the
situation where a married couple files jointly for federal
income tax purposes, but for Ohio income tax purposes one
spouse is a nonresident. Prior to adopting this rule, ODT is
seeking public comment on the draft of the rule. Public
comment should be made to Leslie Akers by e-mail at leslie_akers@tax.state.oh.us
or by calling her at (614) 644-6896. Please submit your
comments related to this proposed rule no later than the end
of the day October 10, 2006.
Reason for the rule.
This rule addresses how Ohio’s personal income tax should be
computed when spouses file a joint federal income tax return
but one of the spouses is a full-year nonresident of Ohio for
personal income tax purposes and has no Ohio income. The rule
also provides examples of how to make the computation.
Draft of Rule 5703-7-18 Nonresident “married filing
jointly”.
(A) For purposes of this rule a “non-liable MFJ spouse” is an
individual who for the taxable year meets all the
requirements in paragraphs (A)(1) to (A)(3) of this rule.
(1) The individual’s filing status for federal income tax
purposes is “married filing jointly;”
(2) For purposes of Chapters 5747. and 5748. of the Revised
Code, the individual is a full-year nonresident of this
state; and
(3) The individual did not directly, or indirectly on account
of either (or both) an equity investment in a pass-through
entity or a distribution from a trust, earn or receive income
which, for purposes of computing the nonresident credit
allowed by division (A) of section 5747.05 of the Revised
Code, would be apportioned or allocated to this state under
sections 5747.20 to 5747.231 of the Revised Code.
(B) Section 5747.08 of the Revised Code requires that an
individual’s filing status for the taxable year for Ohio
personal income tax purposes and for school district income
tax purposes be the same as the individual’s filing status
for federal income tax purposes (Title 26 of the United
States Code) for that taxable year. As such, each individual
whose filing status for federal income tax purposes is
“married filing jointly” for the taxable year must use the
“married filing jointly” status for that taxable year for
both Ohio personal income tax purposes and school district
income tax purposes. This requirement applies even if one or
both of the “married filing jointly” taxpayers are full-year
nonresidents of Ohio.
(C)(1)(a) Except as set forth in paragraph (C)(1)(c) of this
rule, when computing Ohio adjusted gross income less
exemptions, no individual is allowed a deduction for any item
of income or gain unless division (A) of section 5747.01 of
the Revised Code expressly provides for the deduction.¬
(b) Nothing in division (A) of section 5747.01 of the Revised
Code allows a deduction for income or gain of a non-liable
MFJ spouse solely because such income or gain is neither
earned nor received in this state.
(c) Paragraph (C)(1)(a) of this rule does not apply to
military service compensation described in the Servicemembers
Civil Relief Act of 2003, 50 U.S.C. 501 (hereineafter,
“Servicemembers Act”). Pursuant to that act a nonresident,
when computing Ohio adjusted gross income less exemptions,
can deduct such compensation.
(2) All items of income and gain which are not allowed as a
deduction under division (A) of section 5747.01 of the
Revised Code, and all compensation which is not deducted
pursuant to the Servicemembers Act, will enter into the
computation of the nonresident credit. This applies even if
the items and compensation are those of a non-liable MFJ
spouse.
(D)(1) The non-liable MFJ spouse shall not be liable for any
tax, interest penalty, or penalty, if any, due by the spouse
of the non-liable MFJ spouse for the taxable year.
(2) The non-liable MFJ spouse shall not be required to sign
the personal income tax return or the school district income
tax return required to be filed by the spouse of the
non-liable MFJ spouse for the taxable year.
(3) The non-liable MFJ spouse shall not be required to file
the personal income tax return or the school district income
tax return required to be filed by the spouse of the
non-liable MFJ spouse for the taxable year.
(E) Paragraphs (E)(1), (E)(2), and (E)(3) of this rule each
set forth an example illustrating the application of this
rule.
(1) H and W are a married couple with no dependents. H is a
full-year resident of Ohio with wages of $40,000 earned in
this state. W is a full-year resident of Pennsylvania with
wages of $60,000 earned in that state. They have no other
sources of income. They file a joint federal income tax
return reporting federal adjusted gross income of
$100,000.
H is liable for Ohio tax, both as a resident of this state
and as an individual with income from sources in this state.
Since H and W filed a joint federal income tax return, H must
compute tax beginning with the $100,000 joint federal
adjusted gross income. Accordingly, H must calculate Ohio
income tax on $100,000 less the deduction allowed under
section 5747.025 of the Revised Code for two personal
exemptions. H can then reduce the tax so calculated by two
exemption credits allowed by section 5747.022 of the Revised
Code. From that net amount H can then claim, under division
(A) of section 5747.05 of the Revised Code, the nonresident
credit. In this example the nonresident credit will be 60%
($60,000/$100,000) of the Ohio income tax after reduction for
the exemption credit. The remaining 40% of the calculated
Ohio income tax after reduction for the exemption credit is
the net Ohio income tax that H owes before reduction for
refundable credits such as estimated tax payments made.
Because for the taxable year W meets the definition of
“non-liable MFJ spouse” set forth in paragraph (A) of this
rule, W is not liable for any Ohio income tax and related
interest, interest penalty, or penalty, if any, due for that
taxable year; W is not required to sign the Ohio “married
filing jointly” income tax return, and W is not required to
file the Ohio “married filing jointly” income tax return (but
H is required to sign and file the Ohio “married filing
jointly” income tax return).
(2) H and W, a married couple with no dependents, are both
full-year residents of a state other than Ohio. They are both
employed by a business (which is an unrelated person) in that
state and earn wages of $50,000 and $30,000, respectively. W
is also a limited partner in a partnership conducting
business in Ohio (assume the partnership’s property, payroll,
and sales Ohio apportionment ratio is .500000). For the
taxable year W has a $20,000 distributive share of ordinary
income from the limited partnership. Other than H’s wages
earned entirely outside Ohio, H has no other sources of
income. H’s and W’s filing status for federal income tax
purposes for the year is married filing jointly. They have no
other income and no adjustments to gross income; so, their
adjusted gross income for federal income tax purposes is
$100,000.
Because W has a distributive share of income from a
pass-through entity doing business in Ohio, W is liable for
Ohio’s personal income tax. For purposes of computing the
nonresident credit allowed by division (A) of section 5747.05
of the Revised Code, only $10,000 of W’s $20,000 distributive
share of partnership income is apportioned to Ohio. On the
other hand, since H has not directly or indirectly earned or
received any income in Ohio, H is not subject to Ohio income
tax. However, because section 5747.08 of the Revised Code
provides, in part, that if a husband and wife file a joint
federal income tax return for a taxable year, they shall file
a joint return under this section for that taxable year, W
must file for the year an Ohio income tax return and report
on line 1 of the Ohio form IT-1040 the “married filing
jointly” adjusted gross income of $100,000. W cannot deduct
or exclude (i) any of W’s income earned or received outside
Ohio or (ii) any of H's wages earned or received outside
Ohio.
Accordingly, W must calculate Ohio income tax on $100,000
less the deduction allowed under section 5747.025 of the
Revised Code for two personal exemptions. W can then reduce
the tax so calculated by two exemption credits allowed by
section 5747.022 of the Revised Code. From that net amount W
can then claim, under division (A) of section 5747.05 of the
Revised Code, the nonresident credit. In this example the
nonresident credit will be 90% ($90,000/$100,000) of the Ohio
income tax after reduction for the exemption credit. The
remaining 10% of the calculated Ohio income tax after
reduction for the exemption credit is the net Ohio income tax
that W owes before reduction for refundable credits such as
estimated tax payments made.
Because for the taxable year H meets the definition of
“non-liable MFJ spouse” set forth in paragraph (A) of this
rule, H is not liable for any Ohio income tax and related
interest, interest penalty, or penalty, if any, due for that
taxable year; H is not required to sign the Ohio “married
filing jointly” income tax return, and H is not required to
file the Ohio “married filing jointly” income tax return (but
W is required to sign and file the Ohio “married filing
jointly” income tax return).
(3) For the taxable year immediately preceding the current
taxable year, H and W were full-year residents of Ohio. At
some time during the current taxable year W, but not H,
leaves Ohio and establishes residency in another state.
Meanwhile, H continues to reside full-time in Ohio. For the
current taxable year their federal income tax return shows
the following:
Their filing status is married filing jointly and they have
no dependents. H has wages of $25,000 earned in Ohio. W has
wages of $20,000 earned in Ohio (prior to establishing
residency in the other state) and wages of $30,000 earned in
the other state (subsequent to establishing residency in the
other state). W also has $10,000 of long-term capital gain
from the sale of publicly-traded securities (the sale
occurred prior to W’s establishing residency in the other
state) and $15,000 of long-term capital gain from the sale of
publicly-traded securities (the sale occurred subsequent to
W’s establishing residency in the other state). They have no
other items of income or deductions, so their federal
adjusted gross income and their Ohio adjusted gross income is
$100,000.
For the taxable year H and W must file an Ohio income tax
return and indicate a filing status of married filing
jointly. They must enter on line 1 of their Ohio form IT-1040
for the taxable year the “married filing jointly” adjusted
gross income of $100,000 as shown on their federal income tax
return. They can claim two personal exemption deductions and
credits allowed by sections 5747.025 and 5747.022 of the
Revised Code, respectively. With respect to the income W
earned and the gain W recognized after establishing residency
in another state, H and W can claim the nonresident credit
allowed by division (A) of section 5747.05 of the Revised
Code. In this example the nonresident credit will be 45%
([$15,000 + $30,000]/$100,000) of the Ohio income tax after
reduction for the exemption credit.
Because for the taxable year neither W nor H meets the
definition of “non-liable MFJ spouse” set forth in paragraph
(A) of this rule, W are H are jointly and severally liable
for Ohio income tax and related interest, interest penalty,
or penalty, if any, due. W and H are both required to sign
the Ohio income tax return, and they are both required to
file the “married filing jointly” Ohio income tax return.