It’s no secret athletes and entertainers are attracted to no-income tax states, such as Florida, Texas and Nevada. Recently, the tax savings offered by these states was highly publicized as a motivating factor for the departure of Northeast Ohio’s brightest star. Avoiding Ohio’s combined state and local income tax rate (up to 9%) offers a substantial incentive for athletes and entertainers to become Ohio nonresidents. By properly supporting a change in residency, nearly all of the athlete’s income, including his salary, earnings from endorsements and investment income, will avoid Ohio income tax. However, establishing Ohio nonresident status for an athlete with continuing connections to Ohio (or, frankly, any individual with multiple residences) is not as simple as presented by the national media. This post addresses two situations: 1) an athlete who has always resided in Ohio signs with a team outside Ohio, but continues to maintain an Ohio home with immediate family residing in Ohio; and 2) an athlete that grew up and lived outside Ohio comes to play for an Ohio based team, but retains a residence in his “home” state.
Unless the irrebuttable presumption of non-Ohio residency applies, the athlete’s residency for Ohio personal income tax purposes is determined by the common law “domicile” test. One’s domicile is his permanent legal residence intended to be used for an indefinite period and to which, when absent, the person intends to ultimately return. The key focus is the athlete’s subjective intent as to his permanent residence – where he intends to remain indefinitely.
In the first example, assume the athlete plays for a team in a no-income tax state, but retains a luxurious Ohio home where his family continues to reside and to which the athlete will return in the offseason. The athlete may also wish to participate in or hold charitable events in Ohio. In order to overcome the presumption of Ohio residency due to the retention of an Ohio home, the athlete must take certain steps to evidence his change in intent or bear the risk of remaining an Ohio resident for income tax purposes. Actions and public statements inconsistent with the athlete’s change in intent may lead to a challenge of his resident status.
In similar situations, albeit involving individuals with modest livings, taxpayers have been found to retain their Ohio residency even though they spent a majority of time outside Ohio for employment purposes, when the employment is temporary and the individual’s family stays in Ohio. One case even concluded that an individual’s five-year employment outside Ohio was temporary because he always intended to return to Ohio.
In the second hypothetical, assume the athlete grew up and attended college in a no-income tax state but ultimately plays professionally for an Ohio team. The athlete purchases an Ohio residence where he resides in-season but continues to maintain an offseason home in the no-income tax state where his family primarily resides. Despite spending a significant amount of time in Ohio, the athlete intends to ultimately return to his home state after his tenure with the Ohio team ends. While the athlete’s intent may appear clear – not to be domiciled in Ohio – this intent may be scrutinized if, again, his actions or public statements are inconsistent.
Although there is no cookie-cutter approach, through our substantial experience with Ohio personal income taxes and residency matters, we can outline and maintain a plan tailored to the athlete’s unique circumstances to support his bona fide intent to be domiciled in a no- or low-income tax state, despite maintaining a secondary Ohio residence and other connections to the state. Obviously, it is very advantageous to develop and implement this plan in conjunction with the individual’s change in domicile, rather than addressing it after the individual’s domicile is challenged.