Thinking of Changing New York Residency Status to Eliminate State Taxes?
Thinking of leaving New York and relocating to a “no tax” state like Nevada, Texas, or Florida to eliminate state taxes? Not so fast. Moving out of New York, from an individual income tax perspective, can be a “sticky” process and more complex than many expect. The criteria used in a residency analysis are extremely fact-intensive. It is important to remember that each individual’s situation is different, which makes the analysis somewhat subjective. Lastly, while these rules can be confusing, there are two foundational residency concepts—“domicile” and “statutory residency” — that must be addressed to determine whether an individual is a New York “resident” for income tax purposes.
An Overview of New York State’s Rules
Under New York Tax Law, a “resident individual” for income tax purposes generally means an individual who is “domiciled” in or a “statutory resident” of New York. A “resident individual” includes anyone who is:
The majority of taxpayers are not aware of the intricacies of these rules. Individuals routinely claim to have changed their domicile from New York to another state (for example, Florida), only to learn that, for tax purposes, they may still be deemed to be domiciled in New York. The same is true for individuals who are domiciled outside of New York but who, upon audit, are found to be New York, statutory residents. (Indeed, individuals are often surprised to learn that they can legally be treated as a resident of more than one state.) This is an area that is highly scrutinized by the New York State Department of Taxation and Finance (DTF) and proliferation of residency audits focusing on the 2020 tax year are anticipated due to pandemic-related migrations and the acceleration of remote work.
What is the Clear Definition of “Domicile”?
While there is no statutory definition of “domicile,” the law is clear that a domicile is a place that an individual intends to be her permanent home and the place to which such individual intends to return whenever she has been absent.
DTF regulations provide that:
A domicile, once established, continues until the individual in question moves to a new location with the bona fide intention of making such individual’s fixed and permanent home there. No change of domicile results from removal to a new location if the intention is to remain there only for a limited time; this rule applies even though the individual may have sold or disposed of such individual’s former home. The burden is upon any person asserting a change of domicile to show that the necessary intention existed.
Although an individual certainly may have more than one house, he or she can have only one domicile. If a person has two (or more) homes, the individual’s domicile is the place that he or she regards and uses as his or her permanent home. When evaluating a person’s intentions, the length of time spent at each location, comparison of the size of each home, furnishings, and other factors are considered, but may not necessarily be conclusive.
As noted above, an individual’s domicile is the place to which the individual “intends” to be his or her permanent home. As intent can be difficult to determine, DTF has issued Non-Resident Audit Guidelines, which set forth five primary factors that are used in addressing domicile determinations. If the five primary factors are inconclusive, an auditor will then review an extended list of secondary factors that provide a framework for evaluating whether a reasonable conclusion can be established that an individual has demonstrated a change in their domicile away from New York to a new location.
The five primary factors are as follows:
With the sudden and dramatic impacts of the COVID-19 pandemic, including mandated social distancing, significant travel restrictions, and the rise of remote work-from-home arrangements, the 2020 and, to a certain degree, 2021 tax years have seen widespread migration and relocation. The focus of a residency audit will be to examine whether these moves were, in fact, permanent or merely temporary. Individuals claiming to have changed their domicile away from New York should plan now to deal with these issues.
In anticipation of a more mobile workforce and the widespread adoption of teleworking on a more permanent basis going forward, enabling individuals to live and work in different locations with more ease than in the past, the DTF’s current rules may well require updating. Nevertheless, taxpayers must be prepared to answer questions regarding these five factors to support a claim of a change in domicile.
The list below comprises additional steps for individuals that are considering relocating from one state to another. Although each of these statements represents a step that may be used to establish a change in domicile, in the final analysis, domicile is a subjective matter, based on sentiment and associations. No one step in isolation will guarantee success in changing domicile for tax purposes; the following steps will help to support a domicile change and will present a fuller story to the auditor.
Aside from asserting that an individual remains domiciled in New York, the DTF can also assert that an individual, domiciled elsewhere, is nevertheless a “statutory” tax resident if he or she maintains both a permanent place of abode in New York and spends more than 183 days in the state during a given tax year. This relatively straightforward set of criteria can become extremely complicated: What is an “abode”? What if one has access to the abode for only part of the year? What constitutes a “day”? What if one is in New York to see a doctor or just traveling through? There are significant regulatory and judicial authorities on each point. However, unsuspecting individuals, such as an executive who legally resides in Connecticut or New Jersey but works in New York and rents a small apartment in Manhattan (used only when working late at the office), can become a statutory resident and incur significant personal income tax liabilities as a result.
The DTF regulations define a “permanent place of abode” as:
A dwelling place of a permanent nature is maintained by the taxpayer, whether or not owned by such taxpayer, and will generally include a dwelling place owned or leased by such taxpayer’s spouse. However, a mere camp or cottage, which is suitable and used only for vacations, is not a permanent place of abode.
It is important to realize that New York has historically interpreted a “permanent place of abode” in broad terms, ranging from the reasonable (such as ownership of a co-op or rental apartment) to the peculiar. In addition, “intent” related to the use of an abode is not relevant; so, if a New York non-resident maintains a vacation property in New York, they likely have a “permanent place of abode” and the residency analysis will then turn to the “day count.
Counting the days spent within New York is a critical element of the statutory residency analysis. If an individual is not domiciled in New York but maintains a permanent place of abode in the state for a “substantial” part of a calendar year, such individual will be considered a resident if he spends more than 183 days in New York during the year.
The DTF’s audit policy defines “substantial” to mean a period exceeding 11 months. For example, an individual who acquires a permanent place of abode on March 15 and spends 184 days in New York would not be a statutory resident because the permanent place of abode was not maintained for substantially the entire year (although he or she may be classified as a “part-year” resident, which is beyond the scope of this article). Similarly, if an individual maintains a permanent place of abode at the beginning of the year but disposes of it (or leases it such that he no longer has access to the abode) on October 30 of that tax year, he should not be a statutory resident despite spending more than 183 days in New York.
Any person who maintains more than one permanent place of abode should maintain proper books and records that substantiate her day-to-day whereabouts for the entire year, such that she would be able to demonstrate the number of days spent within New York (or, in the alternative, outside of New York). Unfortunately, any individual selected for a residency examination is, under most circumstances, presumed to be a New York resident unless he or she can prove otherwise; in other words, the burden of proof typically falls on the taxpayer to demonstrate his or her location on any given day and to provide documentation in support of their claim.
Accordingly, individuals owning or renting more than one home should retain adequate records—including cell phone bills, credit card bills, receipts, EZ Pass toll invoices, landline phone bills, travel records, bank statements (especially those that document ATM activity), minutes of board meetings, country club records—as well as a diary, or appointment log or calendar to help establish their whereabouts and to prove the days they spent outside New York. It is equally important to document weekends, vacations, and holidays because New York does not distinguish between work and non-work days when counting days for purposes of the statutory resident test.
Because residency determinations can be extremely complex, navigating through a residency audit can be confusing, time-consuming, and a costly trap for the unwary, especially given the recent events surrounding the pandemic and shifts to a more mobile and remote workforce. Everyone who thought they had definitively abandoned their New York residence due to the pandemic should ask their tax advisor to take a closer look.
The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.