Have you been working from home since the pandemic officially arrived in March 2020? Do you live in a non-taxing city or village? Maybe you live in a city that doesn’t offer a full tax credit for the amount paid to your workplace city. If any of these situations apply, you may be eligible for a local tax refund. The key word being “may.”
Ohio Governor Mike DeWine issued a declaration of emergency on March 9, 2020. In that declaration, the state detailed health orders and guidelines that led to thousands of people working from home. Shortly after this went into effect, larger cities across the state began to worry about the potential lost revenue. According to Ohio law, once you work 20 days in a municipality, an employee could have tax liability in that community, and the employer is required to withhold those taxes. Therefore, companies would have to change withholding from their place of business, to an individual’s place of residence. In many cases, this could save taxpayers hundreds, even thousands of dollars, depending on where they live.
In Cleveland, more than 85% of the city’s income tax is generated from commuters. In 2020 alone, Cleveland budgeted income tax collections of more than $440 million. Enter Ohio House Bill 197. Section 29 of the bill requires employers to continue to withhold local income taxes as if the employees were still working in the office. The Ohio General Assembly approved it on March 25 and Governor DeWine signed it into law two days later. It immediately went into effect, scheduled to remain that way until 30 days after the emergency period ends.
The Buckeye Institute, a conservative-leaning advocacy group, has filed multiple lawsuits on behalf of employees no longer working from their offices in Cincinnati, Toledo and Columbus. If successful, those cities, along with other large cities such as Cleveland, could be forced to refund millions of dollars. They are claiming that House Bill 197 is unconstitutional because it allows cities to tax people who do not use any of their services. The first of those lawsuits was dismissed by a Franklin County judge less than a month ago. The Buckeye Institute has already filed a notice of appeal.
In a related note, the Ohio Board of Tax Appeals just recently ruled that municipalities cannot impose income tax on a portion of employee’s work outside of the municipality. This was in response to a suit filed by a postal worker who only performed 40% of their job within the city, but the city was trying to collect taxes on the full 100% of income.
The City of Cleveland will not comment on the possible loss of income tax revenue. Ohio’s largest municipal income tax collection agency, RITA, has openly stated that they will accept refund requests for 2020. There is a new line item on refund request Form 10A (Box 2 – Due to COVID-19, days worked outside of municipality.) They did add a disclaimer stating that “RITA will hold your request for refund in a suspended status until this litigation is concluded.”
Where does all of this leave us? Recently, Governor DeWine set an end date to the COVID-19 emergency orders – June 2, 2021. At stake is roughly 15 months of local income tax collections. An individual that earns $40k per year, is taxed at 2.5% in their workplace city, and worked from home the entire time in a non-taxing (or zero credit) locality, could save $1,250. Even if their residential tax rate is 1% with a full credit allowed, it’s a $750 savings. Of course, it could be months, or even years, before this is all sorted out.
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