Jim, who is originally from Rochester but now lives and works in Florida, is in town visiting his daughter Katie, who attends Nazareth College. While in town, he is staying at the Brighton 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, Jim and Katie 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 concert tomorrow with me?”
Jim thought for a moment, but then frowned and replied, “I’d really like to Katie, but if I spend another day in Rochester, I’ll owe New York some serious money at tax time.”
Puzzled, Katie 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.
New York is a skeptic with respect to changes in residency 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.
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.
New York tax law defines a resident as one who:
- Is domiciled in New York (explained below), or
- Is not domiciled in New York, but who maintains a permanent place of abode in New York and spends more than 183 days in the state, unless such individual is in active service in the armed forces (statutory residency).
New York personal income tax regulations define “domicile” as 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.
Throughout time, domicile has evolved in the legal sense to be the place where the taxpayer has her true, fixed, permanent home. The term domicile should not be limited to refer to a specific structure, but rather a place/area to which the taxpayer expects to return. Residence, in a strict legal sense means merely a place of abode.
As you can see above, intention is a decisive factor in the determination of whether any particular residence which a person may occupy is her domicile. Obviously, determining your domicile can be a very subjective process. How does one determine what was in the taxpayer’s mind when a new domicile was claimed? To the courts, it is deeds and not words that matter, i.e., do the actions of the taxpayer show the intention of a change in domicile? Two crucial elements are:
- An actual change of residence and
- Abandonment of the former domicile and acquisition of another. Do the taxpayer’s actions support the intention of element 2?
This 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; even partial days count as full days.
Establishing and proving non-resident status
A true change of domicile 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). This is known as “near and dear.” 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 income tax audit.
Keep in mind that, as in the case of Jim 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.
Jack Capron, Esq., CPA, PFS, CFF, AEP, is a principal accountant with The Bonadio Group CPA firm. He has more than 35 years of professional experience in corporate and individual tax planning, estate planning, minimizing tax liabilities in mergers and acquisitions, maximizing tax credit planning and tax exempt planning, among other traditional tax services.
John Fontanella, CPA, CCIFP, is a principal accountant with The Bonadio Group CPA firm. He has more than 30 years of experience offering technical advisory services in taxation and financial negotiations, including federal, multi-state and international income taxes, and he specializes in tax planning for contractors, manufacturers and car/truck dealerships.
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