Tom, who is originally from Buffalo but now lives and works in Florida, is in town visiting his daughter Sarah, who attends grad school at SUNY—Buffalo. While in town, he is staying at the Buffalo house he used to live in before he moved to Florida. He never sold the old house, since it was a handy place to stay when he came back to visit, and it didn’t cost much to keep up. The day he planned to return to Florida, Tom and Sarah were having lunch and she asked him, “Dad, I know that it’s short notice, but could you stay another day and go to the game tomorrow with me?” Tom thought for a moment, but then frowned and replied, “I’d really like to Sarah, but if I spend another day in Buffalo, I’ll owe New York some serious money at tax time.” Puzzled, Sarah asked, “How come? You don’t even live here anymore!”
Unfortunately, the above scenario illustrates a situation that can be very real for many individuals across a broad range of tax profiles. Being classified as a New York State resident for state income tax purposes can easily give rise to a tax liability of thousands of dollars, even for an “average” taxpayer, since New York taxes its “residents” on all of their income, but only taxes nonresidents on the income that’s earned in New York.
For planning purposes, it’s important to have a basic understanding of how New York defines a resident and what a taxpayer has to do to actually change his or her residence, as well as prove it if audited.
How New York Defines a Resident
For state income tax purposes, you are a “resident” of New York State in either of two ways:
- Test #1 - You are “domiciled” in New York (explained below), OR
- Test #2 - You are NOT domiciled in New York, but you “maintain a permanent place of abode” in New York and spend more than 183 days in the state.
With respect to Test #1, although the tax statute itself does not define what the term “domicile” means, the state tax regulations explain that “domicile” means the place that you intend to be your permanent home and the place to which you intend to return whenever you are absent. They go on to say that your New York domicile continues and does not change until you actually establish a domicile somewhere else and that you can have only one domicile at a time. Your domicile is not dependent on your country of citizenship.
Obviously, determining whether your domicile is in New York is a very subjective process and is heavily dependent upon your particular “facts”, as well as on how the taxing authorities view those facts. If you move to another state, it is your responsibility to prove that your domicile has actually changed and that you left New York and established your domicile elsewhere. If you leave New York and spend a number of months or years traveling about, but don’t settle down anywhere, you have not established a new domicile and your tax home is still New York. In the event of a residency audit, a New York State auditor will examine the details of your personal life to a degree that may be unpleasantly surprised.
Test #2 applies when you are actually domiciled somewhere outside New York, but you own or lease a house, condo, or apartment in New York and have free access to use it, even if you don’t. If those conditions are met and you are in the state for more than 183 days during the year, you will be considered a “statutory resident” for New York State income tax purposes, despite the fact that you are domiciled in and pay resident income taxes to another state. It is very important to note that the rules for determining the number of days are extremely strict, and even partial days count as full days.
New York “Ramps Up” Enforcement
As with other states, increased fiscal concerns have motivated New York to focus more on its potential sources of revenue. Those potential sources include New York taxpayers who have reported a change of residence to another state and have either begun filing New York non-resident income tax returns or have ceased filing with New York altogether. New York is a “skeptic” with respect to changes in residency—especially out of the state—and has significantly stepped up its audit activity in that area. With the adoption of new technology and the ability to coordinate with other taxing authorities, along with access to other databases, New York has been targeting taxpayers more and more effectively on residency issues. We can expect to see continued growth in the number of residency audits.
Establishing and Proving Non-Resident Status
A true change of domicile will require some serious changes in your life. These changes will encompass not only where you live, but also how you live, including your business and social relationships, and where you spend your time and money. In order to be successful in establishing a change of domicile, it is important to identify exactly when you left New York and established a new domicile in another state. You haven’t really “left” New York until you have “arrived” somewhere else and made it your “home.”
In a residency audit, an auditor will focus on a number of factors, including where you spend your time (days in New York, days in your new state, and elsewhere), the number of residences you own, their respective values, and where you claim a “homestead” exemption for property tax purposes. Your active business involvements are a very important factor as well. Other significant factors include the location of your family and social life, your banking and other financial relationships, your club memberships, where you vote, and where you are licensed to drive. An extremely important factor is where you keep your most valuable possessions (whether of sentimental or monetary value.) Just about everything in your personal life can be relevant in determining the true location of your “tax home.” Given the pervasiveness and personal nature of the evidence needed, it follows that a residency audit can be much more intrusive than a “traditional” tax audit.
The following are some of the potential “trouble spots” that can arise during a residency audit. At best, they can confuse the issues regarding the location of your domicile. At worst, they may decide decisively against you:
- Having a residence in New York with a significantly greater value than the residence in your new home state.
- Continued and substantial business involvement in New York.
- A lack of significant financial and business relationships in your new home state.
- A concentration of family (including pets) in or near New York, with few such connections in your new home state,
- Continued voter and driver registration in New York.
- Retention of a New York residence, especially if a “STAR” exemption is claimed.
- The presence of the bulk of your most treasured possessions in New York, with comparatively little such property at your new location.
Note that a lot of importance is attached to where you keep your most treasured possessions—whether valued in monetary or sentimental terms—since their location is a very strong clue as to which place you really consider “home.” State auditors are therefore very interested in the location of your “important stuff.” For example, family heirlooms, collectibles, and artwork are rarely kept at a secondary or vacation home. During a “visit” by an auditor to your residence (this really does happen), he or she will note how well your home is furnished and decorated, and whether or not certain amenities are present, as well as any other indications of whether that home is regularly occupied and used as a principal residence.
Keep in mind that, as in the case of Tom in the opening paragraph, even if you meet all the criteria for having a domicile in another state, you could still be taxed as a resident. If you own or lease a “permanent place of abode” in New York and are present in this state for more than 183 days, New York will consider you a resident, “case closed.”
Since it is your responsibility to prove that you are a non-New York resident, you must make a special effort to document the fact of your move from New York (it should be an identifiable event) and your establishment of a bona fide domicile in another state. Contemporaneous documentation is extremely important in defending your position in a residency audit. If you still own or lease a home in New York, make especially sure that you can document where you were each day of the year. A marked-up calendar or diary, airline tickets, credit card statements and receipts, telephone records, and utility bills are some of the items typically requested in a residency audit and their adequacy or inadequacy can make or break the outcome.
General Planning Considerations
Your personal income tax liability, as discussed above, is just one of the concerns affected by your state of residence. Gift and estate tax planning, business and investment planning, and retirement planning can all be seriously impacted by residency issues. Consequently, it is very important to have ongoing access to competent advice. By being proactive, through thoughtful planning and adequate recordkeeping, you will minimize the risks of a residency audit.
The above discussion contains just a brief overview of a complex topic, and should not be construed as tax advice. If you would like to discuss residency issues at greater length or any other planning concerns, reach out to us today.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute an accountant-client relationship.