IRS Issues Retirement Planning Reminder: Required Minimum Distributions

This week the Internal Revenue Service (IRS) issued Information Release 2016-48 (IR 2016-48) as a notice to retirees who turned 70½ years old during 2015.  IR 2016-48 reminds taxpayers who reached 70½ years old during 2015 that, in most instances, they must begin drawing Required Minimum Distributions (RMDs) from their Individual Retirement Accounts (IRAs) and employer retirement plans (such as: 401(k), 403(b), and 457(b) plans) by Friday, April 1, 2016. This April 1 deadline applies to retirees who hold traditional (SEP and SIMPLE) IRAs (but not Roth IRAs), and normally to employer retirement plan participants.

Notably, the April 1 deadline is only applicable to the RMD for the first year after a taxpayer attains age 70½; for years following, the taxpayer must draw the RMD from his or her retirement account by December 31. For example, a taxpayer who turned 70½ in 2015 (born after June 30, 1944 and before July 1, 1945) must draw the first RMD by April 1, 2016, but must also draw another RMD by December 31, 2016. Further, IR 2016-48 provides additional detail about how to calculate the RMD, utilizing the retiree’s life expectancy and retirement account balance as of a certain date. Finally, IR 2016-48 notes other considerations relating to retirees with certain facts or circumstances. For instance, generally employees who have reached age 70½ but continue to work can wait until April 1 of the year after their retirement to begin drawing the RMD.

Biz&TaxHax Tip

As noted in IR 203016-48, now is a good time for retirees to think about their retirement plan. For federal tax purposes, retirees may have received Form 5498 IRA Contribution Information. Box 12b of the Form 5498 should contain the RMD amount that the retiree must draw by the applicable deadline to meet federal requirements. Additionally, as always, retirees should consider state and local tax implications related to their retirement plan distributions. For example, retirees who move from one state to another will want to consider whether their retirement income is taxable in the state where they formerly lived as well as the state to which they moved. In particular, former Ohioans who retire outside of Ohio should read our prior article titled Are Nonresident Pension/Retirement Benefits Taxable in Ohio?, which also summarizes an interesting case related to local taxation of nonresident retirement income.

It is important for Ohio retirees, including former Ohioans who have retired (or those considering retiring) outside Ohio to consult an experienced Ohio tax attorney or consultant to ensure proper tax planning based on their specific facts and circumstances. An Ohio tax lawyer or Ohio tax consultant can assist you in: determining taxability of particular items of income (such as retirement or pension benefits) for federal, state, and local tax purposes;  evaluating your specific facts and circumstances to support proper state domicile under common law; and gathering documentation to support the appropriate tax results.

Ohio Supreme Court Adds Difficulty for Out-of-State Retirees or Executives Seeking to Disclaim Ohio Domicile for Income Tax Purposes

Establishing Domicile Outside Ohio: Affidavit and Statutory Presumption Pre-March 23, 2015

When former Ohio residents decide to move outside Ohio, they often seek to maintain some contact with Ohio, yet establish tax domicile in their new state of residence. There are a few common (often interrelated) reasons that Ohioans decide to leave the state, such as:

1. Retirement (often to Florida, to avoid cold, snowy Ohio winters);

2. Work (as part of a transfer, or perhaps an executive who performs most of his/her duties outside Ohio); and

3. Obtaining a lower (or zero) state income tax rate (often high or fixed income individuals, such as executives or retirees).

Until recently, a retiree or executive moving his or her primary residence from Ohio to another state could more easily maintain some contact with Ohio, while also establishing tax domicile outside Ohio. This way, the taxpayer could obtain an income tax benefit (or at least avoid having tax reporting and payment obligations in both the new state and Ohio), and keep some ties with his/her former home state.

To ensure tax domicile outside Ohio and obtain the above-noted benefits, the taxpayer could file an Affidavit of Non-Ohio Domicile with the Ohio Department of Taxation, attesting that during the tax year he/she was not domiciled in Ohio because he/she had:

1. Fewer than 213 (effective 3/20/2015; previously, fewer than 183) Ohio contact periods; and

2. An abode in a state outside Ohio.

Under Ohio law, as long as the taxpayer’s Affidavit did not contain a false statement, this filing created an irrebuttable presumption that the taxpayer was not domiciled in Ohio during the tax year. See R.C. 5747.24(B)(1).

March 23, 2015 Forward: Ohio Supreme Court Decision Invalidates Affidavit Presumption of Non-Ohio Domicile

The recent Ohio Supreme Court decision in Cunningham v. Testa, Slip Opinion No. 2015-Ohio-2744, basically rendered this statutory presumption of non-Ohio domicile (where a taxpayer files the Affidavit of Non-Ohio Domicile) ineffective. In Cunningham, the Court reasoned that the Affidavit must still be supported by facts and circumstances that would withstand the common law test of domicile. So, it is no longer enough to simply file the Affidavit attesting that the taxpayer has fewer than 183 Ohio contact periods for the year and is not domiciled in Ohio. One needs to actually review the taxpayer’s relevant facts and circumstances related to determining domicile under the common law rule.

Under common law, domicile is a question of intent–whether the taxpayer intends to remain in a jurisdiction permanently, or at least indefinitely–based on all relevant facts and circumstances. A non-exhaustive list of facts and circumstances relevant to determining domicile include:

1. Filing federal income tax returns (address listed on federal returns);

2. Voter registration;

3. Automobile registration;

4. Driver’s license;

5. Location of spouse and children;

6. Mailing address/address where mail is received;

7. Various exemption/credit/etc. application filings (in Cunningham, the taxpayer’s had claimed a homestead exemption application for their Cincinnati home prior to later filing the Affidavit of Non-Ohio Domicile, which was inconsistent);

8. Courts will also look to the place where an individual was: born, raised, educated, married, resided for significant time, etc.

Effectively, following the Cunningham decision it appears that a taxpayer can still use the Affidavit, but it is important to do a self-review of factors to ensure that the total facts and circumstances support the taxpayer’s Affidavit claiming non-Ohio domicile. In other words, it seems that a taxpayer can’t simply rest on the fact that he has less than 183 contact periods in Ohio and has another residence outside Ohio during the tax year to claim no Ohio domicile (as many previously believed would suffice) – the weight of all relevant facts and circumstances must support the position as well.

Summary & Biz&TaxHax Tip

In summary, the Cunningham decision seems to provide the Ohio Department of Taxation significant authority and leverage to require taxpayers filing the Affidavit to further support domicile outside Ohio by the weight of common law factors. So, unless and until the Ohio Legislature addresses this Ohio tax domicile issue, Cunningham appears to be the controlling rule. Accordingly, it is important for former Ohioans (or those considering a move outside Ohio) to consult an experienced Ohio tax attorney or consultant to ensure proper tax domicile review and planning based on their specific facts and circumstances. An Ohio tax lawyer or Ohio tax consultant can assist you in evaluating your specific facts and circumstances to support non-Ohio domicile under common law, and filing the Affidavit to obtain the appropriate tax results.