Ohio Senate Bill 22, effective immediately, incorporates changes made in the Tax Cuts and Jobs Act (TCJA)[1], into Ohio law. Changes to federal law would modify federal adjusted gross income (FAGI), which is the starting point for determining Ohio’s personal income tax base. Some of these changes are temporary, scheduled to sunset after 2025. The list below is not exhaustive as TCJA includes numerous other provisions that may affect Ohio income taxes to a lesser degree.

 

The following provisions would tend to decrease Ohio FAGI:

  • Exemption for Dependents: The bill authorizes taxpayers to claim an exemption for dependents on their Ohio return even though, due to a temporary suspension by the federal Tax Cut and Jobs Act (H.R. 1 of the 115th Congress), they are not able to claim a corresponding federal exemption. State law currently requires a dependent be claimed on the federal return in order to be claimed on the Ohio return. This provision suspends this state requirement in order to prevent an increase in Ohio personal income tax liability.
  • Newly eligible expenditures for 529 College Savings Plans: The TCJA permits 529 account owners to use distributions from 529 plans to pay K-12 tuition and other education expenses up to $10,000 per student, per year, for enrollment at public, private, or religious elementary or secondary schools.
  • State tax deduction for contributions to 529 college savings plans for K-12. The bill amends Chapter 3334 of the Revised Code to match the expanded definition of eligible higher education expenses enacted by the TCJA. Under the bill, taxpayers may claim a deduction on their state return for contributions made for previously ineligible education expenses, such as tuition for those in kindergarten through 12th grade (up to $4,000 of contributions per child).
  • Depreciation – business income: The TCJA extends and expands bonus depreciation, increases section 179 expensing to $1 million, expands “qualified property” for purposes of section 179 expensing, and makes changes to certain accounting rules for small business. Ohio continues to decouple from IRC Section 179 deduction and IRC Section 168(k) bonus depreciation.
  • Business income deduction: Continuing Ohio law allows a personal income tax deduction for the first $250,000 (joint filers) or $125,000 (single) of business income, and taxes business income at levels above these thresholds at a flat 3% rate. The TCJA changes to business income would not change Ohio income tax liabilities for a substantial majority of taxpayers who take the Ohio business income deduction.

 

The following provisions would tend to increase FAGI for some Ohio taxpayers:

  • Limit on pass-through entity losses: The bill limits the amount of the distributive loss of a pass-through entity (PTE) that a PTE investor may claim in a taxable year, to $250,000 ($500,000 for joint filers). Any remaining loss may be carried forward as a net operating loss (NOL).
  • Limit net interest deduction: The bill limits the existing deduction for net business interest expense to no more than 30% of the business’s adjusted taxable income.
  • Modification of NOL deduction: The bill limits the NOL deduction for a given year to 80% of taxable income, and modifies associated carryback provisions.
  • Moving expenses: The bill repeals a deduction that was allowed for moving expenses incurred by a taxpayer that relocates for work.[2] In addition, employer reimbursements to employees for moving expenses that would otherwise qualify for the moving expense deduction will no longer be excluded from employees’ incomes.
  • Treatment of alimony: Previously, alimony was treated as income by the recipient and deductible for the payer. Under the bill, alimony is not considered income for the recipient, and is not deductible by the payer. Because the amounts involved would in future be taxable to the alimony payer, who is typically subject to higher marginal income tax rates than the payee, this would tend to increase revenue.
  • Re-characterization of Roth IRA conversions: Previously, if a person converted a traditional IRA to a Roth IRA, they could reverse (re-characterize) that decision (return those contributions to a traditional IRA). Generally, when money is converted from a (pre-tax) traditional IRA to an (after-tax) Roth IRA, the transaction is taxable – unless money is converted back to a traditional IRA within a given period of time. The bill prohibits these types of re-characterizations.
  • Exclusion for bicycle commuting reimbursements: Previously, up to $20 of the amount an employer reimburses its employee for bicycle commuting expenses could be excluded from the employee’s income. The bill suspends this exclusion.

The Barnes Dennig Tax Team will keep you informed of any updates and changes as they occur, please reach out if you have any questions about the  changes above, and a member of the tax team will contact you.

 

[1] H.R. 1 of the 115th Congress.

[2] The repeal does not apply to members of the armed forces.