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Ohio Source Income

We had a TCE client yesterday who is a MD resident and the sole beneficiary of a testamentary trust managed in Ohio. The income is all from interest and annuities and is all paid out to the beneficiary each year. This has been going on for a number of years.

This year the attorney said in his cover letter that Ohio says this is Ohio source income and starting with the 2011 payments they will withhold 5% for Ohio income tax. His wording seemed wishy-washy to me, like he really wasn't sure. He also sent a 2010 Ohio 1041 and K-1 showing the income passed through to the client. This has never come up before. The client has always paid just MD tax.

We looked at the Ohio instructions, and I can't figure out why the attorney thinks this is Ohio source income. It didn't seem to meet any of the definitions of nonresident income that is considered Ohio source. We told the client to call the attorney and ask for an explanation. Meanwhile we prepared and e-filed her returns as always.

It wasn't until now that I thought of Art. Can you (or anyone else) shed any light on this? We can always get her back in to deal with an Ohio nonresident return and the resulting MD amendment if we need to.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Reply to
Phil Marti
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I have no expertise with OHIO income taxes. That said, see the link below for the statute that says a trust having an Ohio nexus must withhold 5% from the beneficiary income when the entity income passes $1000.

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Reply to
Alan

Phil, I agree with you that this income doesn't fit the definition of Ohio source income. Ohio Rev, Code Ann. Sec. 5747.23 provides that nonbusiness income of a nonresident beneficiary of a trust is allocated to Ohio in accordance with Sec. 5747.20. Sec. 5747.20(b)(6) says that nonbusiness income such as interest, dividends and distributions is not allocated to Ohio unless the taxpayer is domiciled in Ohio when the income is paid or accrued.

I'm not sure what a "qualifying beneficiary" is under Sec. 5747.41, but if the trust withholds the 5% your client will have to file a nonresident Ohio return to get the withholding back. I don't think the distribution from the trust is Ohio source income.

Katie in San Diego (Fellow TCE Volunteer)

Reply to
Katie

Coupled with Alan's response about the trust's requirement to withhold it looks like that will be the routine going forward. We'll drop her a note for her files. Thanks to you both.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Reply to
Phil Marti

I notice this happening more and more -- states requiring withholding at top marginal rates or on non-source income of nonresidents. Get the money up front and pay it back later (maybe after the legislators who enacted the withholding requirements are termed out so they're somewhere else when the chickens come home to roost ). It's part of the smoke and mirrors approach to balancing state budgets.

Katie in San Diego

Reply to
Katie

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