Ohio Municipal Income Tax Reform May Offer Taxpayers Relief

As tax season rolls around, imagine being issued 37 W-2s in one year. This is the case for some Ohio residents that travel between different municipalities for work (such as plumbers and contractors). Other Ohio taxpayers suffer from double taxation because they live in one jurisdiction while working in another. Ohio legislators and officials have high hopes that the recently passed Ohio municipal income tax reform will help alter the widespread opinion that Ohio has “the most complicated, absurd, and punitive system of municipal taxation in the nation.”

A Background on Ohio Taxation

Ohio is one of only 10 states with municipalities that tax both individuals and businesses. Before Ohio’s municipal income tax reform (formally known as House Bill 5) was signed into law on December 19th, 2014, each of its 600 municipalities had almost complete sway over defining what was considered taxable income, who was liable to pay, and what tax regulations were to be imposed. Trying to comply with each municipality’s tax code has been a tangled mess of forms and frustration.

The Impact of the Tax Reform

Though the recently approved Ohio municipal income tax reform provides welcomed relief, not every issue was resolved. However, there are several changes that could have a direct impact on Ohio residents.

• Employees Traveling Locally Could See a Pay Increase

Previously, you were taxed by a municipality if you worked within its jurisdiction for at least 12 days of the year. These taxes were automatically deducted from your paycheck by your employer, resulting in a large number of W-2s for employees straddling multiple municipalities. Thanks to a “casual” or “occasional” entrant exemption, the number of days you are allowed to work in a municipality annually without being taxed has been increased to 20. Unfortunately, this exemption does not apply to professional athletes, entertainers, or public figures.

• Employees Need to Be More Vigilant About Their Location

It’s important to note that if your employer thinks you will be at a location in another municipality for more than 20 days, they can withhold taxes in that municipality’s name from day one instead of waiting until day 21. If it turns out that you did not work in that jurisdiction for the full time as planned, it’s up to you to file for a refund on taxes paid.

• People Who Receive Certain Types of Income May Owe Less Taxes

The types of income that municipalities can include when calculating your tax load are now defined. In other words, depending on what was considered taxable income in your municipality prior to the reform, you may owe less taxes. The following are now exempt from all municipal taxation: social security benefits, retirement benefits, pension disability benefits, unemployment compensation, sickness, accident, liability insurance proceeds, alimony, and child support.

• Ohio Is Expected to Offer More Job Opportunities in the Future

According to Forbes.com, between 2000 and 2010, Ohio lost more private sector jobs than any other state except for Michigan. The labyrinth of municipal tax laws is cited as a main motivator for this business loss. Ohio legislators and other officials are confident that fixing this system will increase the number of businesses in the state and fuel job growth.

These provisions will be effective on January 1, 2016. If you currently live and work in Ohio, it’s likely that your tax liability will decrease a bit, but again, this will depend on how your municipalities operated before the reform was put into place. Regardless of the specifics, the Ohio tax-filing process for future returns will be a lot less complicated.

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