COVID-19 has presented many challenges: physically, mentally, and financially. To add to that, we now have the tax question of what state are we a tax resident of? Many of us have used this time to “escape” and enjoy a different view for remote learning and work. We have taken advantage of those second homes and have spent more time there than our primary residences. Wonderful for the soul, but have we created a tax nightmare? This becomes especially challenging with an aggressive state like New York. Residency matters can be complex and often costly if not handled properly. States can claim tax on your earned income based upon the location of your permanent residence and where you work. Now is the time, before you file your return to determine your actual state tax situation. If you maintain a permanent place of abode and spend less than 183 days in New York State or City can you claim nonresident status?
Are you a Statutory Resident?
Each state varies in residency requirements. Some may consider you to be a statutory resident even if you have been domiciled elsewhere. If you are a statutory resident of New York City, for example, then you are subject to New York State and New York City’s tax on your worldwide income.
A statutory resident is defined as an individual who is not domiciled in the state but maintains a permanent place of abode in the state and spends more than 183 days of the taxable year within the state (183-day rule).
- PERMANENT PLACE OF ABODE – Is a dwelling of a permanent nature available to the taxpayer than can be used year-round whether owned or leased by the taxpayer or another individual (taxpayer has access to the abode). The taxpayer must have unfettered access to the dwelling. A place of abode will not be considered permanent if it is maintained during a temporary stay for the accomplishment of a particular purpose.
- 183 DAYS – For most states, including, New York and California, the burden of proof is on the taxpayer to substantiate that he or she spent 183 days or less in the respective state. Evidence must be clear and convincing. For example, affidavits, contemporaneously kept calendars, and diaries, tracking apps, credit card charges and utility invoices are examples of documentation that could establish that you spent 183 days or less.
Defining Your Domicile for Tax Purposes
If you moved to a different state, it is important to establish your new state as your legal residency, known as your domicile.
Domicile, as defined by most states, is a home or dwelling where you intend to return to, and which is your true, fixed, and permanent home. You can have multiple residences but only one domicile.
Critical to this analysis is your intention which is a decisive factor in determining whether a residence is your domicile. There is not one single test to determine your state of mind to determine intention and motive. For example, New York has successfully litigated that a taxpayer’s actions speak louder than words. Formal declarations are less persuasive than informal acts. If your life and activities are centered around your primary home, it does not matter that you have a will, voter registration and driver’s license in the nonresident state. There are two broad categories often used to determine if you are domiciled in the state: Primary and Other Factors.
PRIMARY FACTORS: Include your home, active business involvement, time spent, where you keep your items near and dear, and your family connections.
OTHER FACTORS: Include where you receive your mail, the location of your safe deposit box, where you keep your automobile, boat, airplane, where you maintain your license, where you are registered to vote, do you maintain a Manhattan parking exemption, where you executed various legal documents (wills, trusts, school tax relief exemption, homestead exclusion, and leases for rent controlled or rent stabilized apartments).
Each state’s domicile guidelines vary, and it is important to establish domicile correctly to avoid state tax controversies and penalties.
How can we help?
The topic of residency and taxes can be complex and nuanced. With the unique situations that working from home or retreating to a vacation home during COVID-19 have brought, your trusted tax advisors at Schulman Lobel are here to discuss your circumstances in detail and help determine your true tax residency.