Q: Should retirement income made and taxed in another country be taxed by Ohio if it is exempt from federal tax?
My wife emigrated in late 2015. Was resident of Ohio all of 2016. Earns retirement income in Brazil, which is taxed by Brazil. We maintain an apartment and support her mother with that money. IRS 1040, form 1116 allowed her to consider this as income taxed by another country, and is exempt from income tax here. State of Ohio is considering that income as taxable by them and is about to assess a bill of $2,632 for taxes owed. Can this be correct?
A:
The short answer is yes, Ohio will tax this income. Ohio, like many other states, bases its income tax on your Federal Adjusted Gross Income with some special additions and deductions. None of those deductions apply to exclude retirement income earned outside the United States.
Your wife's retirement income from Brazil is included in your Federal Adjusted Gross Income and then IRS Form 1116 allows you to take a credit for the taxes imposed by Brazil. If your US taxes on this income are higher than the Brazilian taxes, then you would end up paying some US income taxes on this income.
For state purposes, because this income is included in your Federal Adjusted Gross Income, it is also included in calculating your state income taxes. Ohio does not appear to allow a similar credit like the IRS does, which is a system followed by most states. But, this also makes sense because you do not typically get a credit on your state income taxes for the federal taxes that you pay on the same income. Here, some of those federal taxes just happen to be paid to a different government, the government of Brazil.
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