Thinking of Leaving New York State? Preparation, Documentation and Intent are Keys to Avoiding Future New York Tax Bills.

By: Justin J. Andreozzi, Esq.

In recent years, many high earning and wealthy New York residents have departed NY State to escape the ever-increasing burden of State and Local taxes. While the prospect of paying no State income tax is appealing, NY State has a strong incentive to review these moves to ensure that are indeed changes in domicile and that they comply with current NY State law.  To accomplish this task, NY State conducts Residency Audits designed to determine whether a taxpayer who files a NYS nonresident tax return, or no NY State return, is in fact a nonresident.   Taxpayers are always surprised to learn that the burden of proving a change in residency lies with the party asserting the change – in most cases the taxpayer.

To be sure, the temptation exists for NY State taxpayers to perceive their sunbelt vacation homes as their “homes,” particularly when those “homes” sit in no-tax States like Florida.  It is no surprise, therefore, that NY State employs hundreds of auditors who conduct thousands of Residency Audits each year.  And those audits generate (or perhaps “recoup”) substantial revenue for NY State.

In this climate, if you’re considering a change in residency any time soon, it’s always best practice to hope for the best but expect the worst – a Residency Audit.  This is easily said, but, inevitably, the taxpayer receiving the Residency Audit notice is stunned that NY State would have the audacity to challenge their motives and accuse them of “faking” residency elsewhere to escape taxes.  This reaction, while understandable, adds to the already-daunting burden of responding to the information requested in the Residency Audit.  The taxpayer often sees it as unconscionable that NY State can drag them back into the tax pit when they’ve chosen to climb out.  But that is precisely what can happen if the taxpayer does not devote the substantial time and attention required – both before and during any Residency Audit – to document and memorialize all possible facts and elements substantiating their bona fide intention to change their residency.  And those facts may well exist in years before the change and in years after the change.

Residency Audits are focused on personal, sometimes almost invasive, information from prior and subsequent years that ultimately may be difficult to document after the fact. Since preparation is the key to making sure your residency transfer survives a NYS scrutiny, our goal is to help you identify the key issues and facts that must be addressed well before you embark on your life-changing venture.   We provide below a thumbnail overview of the law and elements of residency changes as a general guide to the process.  The information is provided only as an overview, and does not cover all the tasks necessary to document and memorialize your residency change.

Understanding Residency and Domicile

“Domicile” is defined as “the place which an individual intends to be such individual’s permanent home – the place to which such individual intends to return whenever such individual may be absent.”[i]  At its core, a person’s domicile is their permanent home and a person must always have no more or no less than one domicile.

NYS defines “resident” as a person that (1) is domiciled in NYS, or (2) maintains a permanent place of abode and spends more than 183 days of the taxable year in NYS.[ii]  So, to establish residency outside of NYS, you must change your domicile and spend less than 183 days in NYS.  NYS expects you to maintain contemporaneous, detailed records that substantiate both elements were accomplished for the tax year the change was made.

Domicile is established through a number of independent factors, which include a vast array of factual circumstances that may include the location of a health care providers, country club membership, voting registration, bank accounts, safe deposit boxes, burial plots, licenses, registrations, vehicles, properties, and family members.

Ultimately, all aspects of a person’s ties to a particular area are analyzed when determining their true domicile.  Auditors will weigh all of the facts tying a taxpayer to NYS, and compare that weight against facts tying the taxpayer to their purported new domicile.  Weighing factors is very subjective, which is why even courts can come to differing opinions as to a person’s domicile when reviewing substantially the same facts.  And in virtually all cases, taxpayers will overlook facts or circumstances that could win the day on residency or, worse, that could trip them up on the issue.

Statutory Residency – “The 183-Day Test”

Statutory residency, also known as “the 183-day test”, is far less complicated than determining   domicile.  The rule is simple: in order to claim residency outside of NYS, you cannot spend more than 183 days in NYS.  The burden, however, is almost always on the taxpayer to prove where they were and when during the tax year(s) under audit.[iii]

This is where proactive planning and preparation comes into play.  Taxpayers changing their residency must know and substantiate how many days in a particular year are spent in various locations.  Tracking can be cumbersome, however there are many cell phone applications that track your location and log it each day for you.  This makes substantiating your days spent in NYS in each individual audit year much easier.

There are nuances to this rule, however, including how travel days are counted., Appreciating and understanding these nuances is critical in ensuring your days are counted correctly.  Working with tax professionals and counsel with experience in this area provides assurances that all of these areas are addressed.

Primary Domicile Factors

While the burden of proving a change in domicile is upon the party asserting the change, the standard of proof associated with that burden is “clear and convincing evidence”.  Therefore, when under a residency audit, a taxpayer must present facts that clearly and convincingly establish that they are no longer domiciled in NYS, and in fact have a new domicile. This involves showing significant ties to their new domicile, while also presenting facts establishing that significant ties were cut with NYS.

NY State auditors may review many factors when evaluating a taxpayer’s domicile.   But there are five primary factors NY State and the courts prioritize:

  1. Home

If a taxpayer maintains a residence in NYS along with community ties, this is a factor that requires substantial ties to the new domicile to overcome the taxpayer’s decision to maintain this significant tie to NYS.

  1. Active Business Involvement

NYS will consider the taxpayer’s employment, as it relates to compensation derived by the taxpayer in the particular year being reviewed.  Business involvement also includes active participation in a New York trade, business, occupation or profession and/or substantial investment in, and management of, any New York closely held business.

  1. Time

Analysis of where the individual spends time during the year.  This overlaps with the statutory residence day tracking, but is different.  The statutory residence test is based solely on days spent in NYS, whereas this factor compares time spent in NYS with time spent in your newly claimed domicile.  This analysis will focus on such nuanced circumstances as where vacation or business travel is originated.  For example, originating a vacation to Europe from the airport in Albany rather than the airport in Fort Myers suggests NY State domicile.

  1. Items Near and Dear

This is the so-called “teddy bear” rule.  The location of items the individual holds “near and dear” to his or her heart, or those items with significant sentimental value, such as family heirlooms, works of art, collections of books, stamps and coins, and those personal items that enhance the quality of lifestyle.  When moving items near and dear to a new domicile it is important to document the move with pictures and receipts when possible.

  1. Family Connections

Simply put – where do minor children attend school, or where does an individual’s spouse live?  This factor, while a difficult one to change, is important.

When all five factors are weighed, it must be clear and convincing that they have more ties to their new domicile than they have to NYS. The difficulty comes however, in determining when enough ties have been cut with NYS and established in the new domicile to confidently stop filing tax returns with NYS as a resident.  Therefore, proper planning and proactive recordkeeping is essential. The real challenge can arise years later when NYS challenges the shift in residency.

Ultimately, the reasons behind a taxpayer’s decision to relocate has only modes import.  What matter are the elements of the statutory residency test discussed above, along with a taxpayer’s ability to prove their change in domicile by clear and convincing evidence.

The team at Andreozzi Bluestein works proactively with taxpayers changing their domicile, and we provide strategies and insights to make the planning and execution processes easier, more efficient and most importantly, reliable.  Clients that engage our firm for proactive residency planning and preparation will increase the likelihood of success in making the change, and will enhance the ability to answer the taxing authority’s residency inquiries in the most effective and efficient manner. Contact us any time for a no-obligation consultation if you are considering a change in residency away from NYS.

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[i] 20 NYCRR 105.20(d).

[ii] Section 605(b) of Article 22 of the Tax Law defines a resident of New York State as one who: (1) is domiciled in New York State; or (2) is not domiciled in New York, but who maintains a permanent place of abode in this state and spends more than one hundred eighty-three days of the taxable year in this state, unless such individual is in active service in the armed forces of the U.S.

[iii] If the taxpayer under audit claimed not to be a NYS resident prior to the tax year(s) being audited, NYS becomes the party claiming a change in residency was made (from wherever the taxpayer previously resided to NYS).  In these cases, NYS Has the burden of proof.

Disclaimer

This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decision of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult an independent licensed attorney before making any decision or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Andreozzi Bluestein LLP and the recipient.

Any links to other web sites are not intended to be referrals or endorsements of these sites. The links provided are maintained by the respective organizations, and they are solely responsible for the content of their own sites.

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