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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.