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New York Tax Authorities Continue Aggressive Stance on Residency Rules!
New Yorkers continue to move out of the state for tax breaks, better business climates, or warmer weather, impacting income tax collections for NY. NYS Department of Taxation and Finance (NYS DTF) continues to aggressively pursue individuals who may still be subject to NY taxation.
Understanding the different ways in which NYS could tax an individual is crucial to mitigate undue exposure to NYS and possibly even NYC taxation. The two primary ways in which NY could tax an individual are (1) as a domiciliary of NY, and (2) as a statutory resident of NY. There is much confusion that occurs between the two. Let’s set things straight!
Domicile Test
To show a change in domicile, the taxpayer must show the intent to move his domicile and satisfy five primary factors by clear and convincing evidence. The five factors are: (1) Home; (2) Active Business Involvement; (3) Time Spent; (4) Family Connections; and (5) Items Near and Dear. With these five factors, NYS is comparing each in the old domicile state versus the new domicile state, to gather whether the taxpayer has severed enough ties to NY.
The Home factor compares the nature and use of the residence held in each state, as well as the taxpayer’s connections to the community in the new domicile and the location of important events and holidays.
The Active Business Involvement factor looks to whether the taxpayer has an active role in the day-to-day operations of a NY business.
The Time Spent factor is often confounded with the day count requirement for the Statutory Residency test which will be discussed next. With this factor, NYS DTF compares the time spent in NY with the time spent in the new domicile only, looking for a significant change in the taxpayer’s lifestyle pattern.
Family Connections usually inquires as to the location of the taxpayer, spouse, and any minor children, with an inquiry as to where the minor children attend school. Most recently, NYS DTF has begun to question the location of immediate family (i.e., grandchildren, parents, siblings).
The Items Near and Dear factor asks for the location of those items of sentimental or monetary significance to the taxpayer, such as family heirlooms, photos, wine collections, artwork, and jewelry.
Other factors, while not determinative in a change of domicile matter, should be considered. Changing one’s driver’s license, registering the car, and voting in the new domicile state are all examples.
Statutory Residency Test
Despite satisfying the domicile test, an individual may still be taxed as a NY resident under the Statutory Residency Test.
A statutory resident is a nonresident who maintains a permanent place of abode (“PPA”) in NY for substantially all of the year, AND spends more than 183 days of the tax year in NY. Again, statutory residents subject their worldwide income to taxation in NY. If the PPA is located in one of the five boroughs of NYC, then worldwide income may be subject to NYC tax as well.
A permanent place of abode must be habitable for year-round use and maintained for substantially all of the year which, for tax years 2022 and forward, equates to 10 months or more. Placing the property in a trust or in a family member’s name will not remove you from the first part of the test. In fact, NYS DTF will analyze whether you have a residential interest in the abode, which essentially asks if you have unfettered access to the residence and if you keep your personal effects there.
In most cases, any part of a day spent in NY is considered a NY day. There are limited exceptions for travel through the state and inpatient medical care. Keeping contemporaneous records such as day count apps, cell phone records, calendars/diaries, travel documents, and credit card statements is key. The burden of proof is on the taxpayer to show his whereabouts on any given day by clear and convincing evidence – a very high standard!
Key Takeaway
Do not fail to plan. The residency rules of NY are complex, and a misstep could result in undesired consequences. Consulting with a knowledgeable and experienced tax professional regarding the tax implications of moving out of NY or maintaining a second residence in NY, along with keeping detailed contemporaneous records, is key to avoiding a messy and costly audit process.
For more information contact:
Marisa Friedrich
Senior Counsel
Tax Controversy Group
Chaves Perlowitz Luftig LLP
W. 212-223-5704
This subject is very important especially for our clients who own or are considering purchasing a pied-a-terre. Please let us know if you have any questions.
Warm regards,
The Stacey Froelich Team
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