Do expats from Ohio still need to pay state taxes?

Navigating Ohio's tax laws can be complex, particularly for residents who move abroad. Ohio, like many states, has specific regulations determining when individuals are required to pay state taxes, even if they no longer reside within its borders.

These rules hinge on the concepts of residency and domicile, making it crucial for expats to understand their tax obligations.

For Ohio expats, understanding state tax obligations is essential to avoid unexpected financial burdens. Even after moving abroad, certain conditions may require you to continue paying Ohio state taxes.

TLDR:

Understanding Ohio's tax residency rules

Ohio's tax obligations for residents living abroad are determined by residency status, which can be categorized into three main types: Resident, Nonresident, and Part-Year Resident. Each status has distinct criteria and tax implications.

Resident

Definition: An individual is considered a resident if Ohio is their domicile, meaning it's their permanent legal residence. Temporary absences from the state do not change this status.

Tax Implications: Ohio imposes income tax on all income of resident individuals, even if that income is earned outside of Ohio or the United States. Residents are taxed on their worldwide income.

Nonresident

Definition: Nonresidents are individuals who do not meet the criteria for being considered residents. They may work in Ohio or earn income from Ohio sources but live elsewhere.

Tax Implications: Nonresidents are only taxed on income earned from Ohio sources, such as wages for work performed in the state or income from property located in Ohio.

Part-Year Resident

Definition: This status applies to individuals who move to or from Ohio during the tax year. It covers those who change their permanent home from Ohio to another location or vice versa.

Tax Implications: Part-Year Residents are taxed on all income received while they were Ohio residents and only on Ohio-source income received during the portion of the year they were nonresidents.

What constitutes Ohio-sourced income?

Ohio-sourced income is essential in determining tax obligations for nonresidents and part-year residents. This includes, but is not limited to:

• Employment Income: Wages or salaries earned while working in Ohio.
• Business Income: Earnings from operations conducted within Ohio, whether through ownership of a business or part of a partnership.
• Property Income: Rental income or proceeds from the sale of real estate located in Ohio.

Why should Ohio expats move domicile to a state with zero state income tax?

State income tax savings

For retirees and high-income individuals from Ohio, moving to states without income taxes such as Florida, Texas, or Nevada can offer significant financial advantages. Without the burden of state income taxes, you can keep more of your earnings, allowing for greater investment opportunities or an enhanced lifestyle.

Inheritance tax benefits

States like Florida and Texas not only lack a state income tax but also do not impose state estate taxes. This can considerably reduce the tax burden on your estate, ensuring that more wealth is passed on to your heirs. This is especially advantageous for individuals with substantial assets who wish to maximize the inheritance for their beneficiaries.

Flexibility and mobility

Relocating your domicile to a no-income-tax state enhances your flexibility and mobility, allowing you to travel and live in various locations without worrying about high state tax bills. This is ideal for high-income earners with business interests in multiple states or countries and for retirees who desire to spend their later years exploring new places.

Moreover, the absence of state income taxes simplifies your tax filing process. You will only need to file federal taxes, reducing the complexity and potential for errors in your tax returns, making financial management more straightforward.

How to leave Ohio tax residency?

When you decide to relocate to another country or state, changing your Ohio residency status requires a series of deliberate steps to ensure a smooth transition.

Here’s a step-by-step guide to help you navigate this process:

1) Establish new residency

Secure a residential address in your new location. This is the first step in establishing your new domicile.

Consider filing a Declaration of Domicile in the new state, solidifying your intent to make it your permanent home.

Reference guides like Savvy Nomad’s domicile guides may provide additional help for specific states:

• Florida residency guide
• South Dakota residency guide
• Texas residency guide
• Nevada residency guide

2) Transfer IDs and registrations 

Update your driver's license and vehicle registration promptly to reflect your new address, establishing your presence in the new state.

3) Register to vote 

Register to vote in your new location; it demonstrates your commitment to your new domicile.

4) Update documents

Ensure all personal documents, such as identification cards, medical records, insurance policies, and financial documents, are updated with your new address. This consistency is important for establishing your new residency status.

5) Notify your employer

Inform your employer about your residency change. This is particularly important if your move affects how your income is taxed, potentially shifting some of it away from being classified as "Ohio-sourced."

6) Notify IRS 

Inform the IRS of your address change using Form 8822. Extend this notification to all personal and professional entities.

7) Keep records

Maintain detailed records of all your relocation actions, including receipts, bills, and legal documents. These records can be invaluable, especially if your residency status is questioned.

8) Anticipate an audit

Be audit-ready with comprehensive proof of your move’s permanence.

Tax benefits and exemptions for Ohio expats

Living abroad as an expat comes with various federal tax benefits and exemptions that can help reduce your overall tax burden. Here are some of the key federal tax advantages available:

Foreign Earned Income Exclusion (FEIE)

The FEIE allows U.S. taxpayers living abroad to exclude a certain amount of their foreign-earned income from U.S. federal income tax.

For the tax year 2024, this exclusion amount is up to $126,500.

To qualify, you must pass either:

• Bona Fide Residency Test: You qualify if you are a resident of a foreign country for an uninterrupted period that includes an entire tax year.
• Physical Presence Test: You qualify if you are physically present in a foreign country for at least 330 full days during a 12-month period.

FEIE Guide

Foreign Tax Credit (FTC)

The FTC helps you avoid double taxation by allowing you to take credit for foreign taxes paid on income that is also subject to U.S. federal tax.

This credit can significantly reduce your U.S. tax liability, especially if you reside in a country with high tax rates.

FTC Guide

Foreign Housing Exclusion (FHE)

The FHE allows you to exclude certain housing expenses from your federal taxable income, including rent, utilities (excluding telephone), and other reasonable expenses related to housing abroad. The amount you can exclude is limited to a base amount plus housing expenses exceeding 16% of the FEIE limit.

FHE Guide

Filing Ohio state taxes from abroad

Filing Ohio state taxes from abroad involves several critical steps to ensure compliance and avoid penalties. Understanding your residency status, identifying Ohio-sourced income, and utilizing digital filing options are key components of this process.

1. Determine your residency status

• The first step is to establish whether you're considered a resident, nonresident, or part-year resident for the tax year. This status significantly influences your tax filing obligations.
• Residents must report all income, regardless of where it is earned, while nonresidents only report Ohio-sourced income. Part-year residents report income based on their residency period in Ohio.

2. Identify Ohio-sourced income

Ohio-sourced income includes:

• Wages and salaries for services performed in Ohio.
• Business income from activities conducted in Ohio.
• Rental income from property located in Ohio.
• Capital gains from the sale of real estate or tangible property in Ohio.

3. Understand filing requirements

• For Residents: If you were a resident of Ohio for any part of the year and are required to file a federal tax return, you likely need to file a state return as well.
• For Nonresidents: You must file Form IT-203 if your Ohio-sourced income exceeds your Ohio standard deduction or if you wish to claim a refund of Ohio state income taxes withheld from your pay. Additional filing requirements apply if you want to claim certain refundable or carryover credits or had a net operating loss for Ohio state personal income tax purposes.
• For Part-Year Residents: You must file an Ohio state tax return reporting all income received while a resident and any Ohio-sourced income received while a nonresident.

4. Filing deadlines and forms

• The typical deadline for filing Ohio state taxes is April 15. Nonresidents and part-year residents should focus on Form IT-203, Nonresident and Part-Year Resident Income Tax Return.
• Gather all necessary documentation, including income statements and records of days spent in Ohio, if applicable.

5. Digital filing options

• Ohio offers e-filing services that simplify the tax filing process for expatriates. These digital platforms guide you through filing, ensuring you meet Ohio state requirements.
• Utilizing e-filing services can streamline the process, reduce errors, and expedite the processing of your tax return.

6. Paying estimated taxes

• If you anticipate owing taxes, you might need to make estimated tax payments throughout the year. This can help avoid penalties for underpayment when you file your tax return.
• Estimated tax payments can be made online through the Ohio Department of Taxation’s website.

7. Extensions and penalties

• If you need more time to file, you can request an extension, typically pushing the filing deadline to October 15. However, this extension is for filing your tax return, not for paying any taxes owed.
• Interest may accrue on any unpaid amounts from the original April 15 deadline, even if you file later. Therefore, to minimize interest and penalties, it is advisable to estimate and pay any owed taxes by April 15.

Consequences of non-compliance with Ohio tax laws

Failing to adhere to Ohio's tax obligations carries serious implications for expatriates and former residents. Understanding these consequences underscores the importance of maintaining compliance with state tax laws.

1. Financial penalties

• Late Filing Penalty: If you fail to file your Ohio tax return by the deadline, you may incur a late filing penalty. This penalty is typically a percentage of the unpaid taxes and increases with the length of the delay.
• Late Payment Penalty: Taxes that are not paid by the due date are subject to a late payment penalty. This penalty is generally 5% of the unpaid tax for each month or part of a month the tax remains unpaid, up to a maximum of 25%.
• Underpayment Penalty: If you underreport your income or underpay your taxes, Ohio may impose penalties and interest on the amount underpaid. This can significantly increase your tax liability.

2. Interest charges

• Unpaid taxes accrue interest from the original due date of the return until the taxes are paid in full. The interest rate is determined by the Ohio Department of Taxation and is subject to change annually.
• Interest on unpaid taxes can add a substantial amount to your overall tax liability, making timely payment crucial.

3. Legal sanctions

• In severe cases, such as intentional tax evasion, the repercussions can extend beyond financial penalties to include legal action. Ohio may pursue criminal charges against individuals who willfully evade state tax laws.
• Convictions for tax evasion can result in significant fines, imprisonment, or both, depending on the severity of the offense.

4. Collection actions

• Ohio may take collection actions against individuals who fail to pay their taxes. These actions can include wage garnishments, bank account levies, and liens on property.
• Collection actions can disrupt your financial stability and impact your credit rating, making it difficult to secure loans or other financial services.

5. Audits and assessments

• The Ohio Department of Taxation may audit your tax returns to ensure compliance. Residency audits can be triggered by various factors, such as high income or significant changes in domicile status.
• During an audit, you may be required to provide extensive documentation to prove your residency status and income sources. Failure to provide adequate proof can result in additional tax assessments and penalties.