26 July 2019 Ohio legislation lowers individual income tax and changes definition of pension for Ohio city income tax purposes On July 18, 2019, Governor Mike DeWine signed Amended Substitute House Bill 166 (HB 166), Ohio's fiscal year 2020-21 budget legislation. Ohio had been operating on a temporary budget since June 30 due to state legislators' inability to come to an agreement on the legislation before the legal deadline. The House and Senate were ultimately able to negotiate a compromise version that the Governor signed, subject to certain line-item vetoes. As finalized, HB 166 contains significant tax changes, including, reduction of individual income tax rates and a change in the definition of taxable pensions for purposes of imposing Ohio city income taxes. HB 166 eliminates the bottom two individual income tax brackets, reducing the number of brackets from seven to five, effective January 1, 2019. The elimination of the bottom two brackets effectively exempts from Ohio individual income tax any individual with annual income of $21,750 or less. The indexing of brackets and exemptions is frozen for tax years 2019 and 2020 at 2018 levels with indexing resuming in tax year 2021. HB 166 also reduces tax rates for the remaining brackets by 4% for tax year 2019. An additional 4% rate reduction had been proposed for tax year 2020 but was not included in the final version of the legislation. The credits for campaign contributions and for a passthrough entity investor's share of the Ohio Financial Institution Tax are repealed effective for 2019 and forward. HB 166 also requires taxpayers to include income subject to the business income deduction (BID) for purposes of determining eligibility for certain means-tested income tax credits and the homestead exemption for real estate taxes. Before 2016, Ohio city ordinances typically provided an exemption for "income from pensions." The term was usually not defined in the city ordinance and controversies resulted over the treatment of certain retirement income, including supplemental executive retirement programs, or SERPs. The Ohio Supreme Court eventually held that SERPs were pensions for purposes of the city income taxes in McDonald v. Cleveland Income Tax Board of Review, Slip Opinion No. 2017-Ohio-7798. In 2016, Ohio adopted a model ordinance for Ohio cities, which also provided for an exemption from city income tax for pensions. However, the model ordinance did not define pensions. Effective in 2016, several Ohio cities modified the model ordinance to define a pension as effectively including only amounts reported on an IRS Form 1099-R, which resurrected the issue of whether SERPs qualified as pensions. Effective for tax years starting in 2020, HB 166 adds definitions of a pension and retirement benefit plan to the model ordinance. A pension is defined as a retirement benefit plan, which is further defined as an arrangement under which an entity provides benefits to individuals either on or after their termination of service because of retirement or disability. A retirement plan does not include wage continuation payments, severance payments, or payments for accrued personal or vacation time. The exemption does not depend on whether the retirement plan satisfied the requirements of IRC Section 401(a). Exempt amounts do not include elective employee contributions or deferrals.
Document ID: 2019-1359 | |||||||
