While a halt in state income tax payments can trigger a residency audit in many states, New York City is one of the few municipalities to aggressively pursue them. With office buildings across the city dark for most of 2020 and employees flocking to other states or second homes, many taxpayers are left wondering where their 2020 resident state and local tax (SALT) obligations lie.
This issue is often the blurriest for New York State residents, who still reside in the state but resided primarily (or exclusively) in homes in Long Island, Westchester or other NYC suburbs last year. Unlike a move from NYC to Florida, relocations within New York State are more complicated because the taxpayer, job and family are already domiciled to the state.
On the surface, NYC residency rules appear to be straightforward because the city follows many of the same statutory rules as NYS, including the 183-day domicile rule. In reality, it is not always so clear, especially for tri-state area residents that may still own an apartment or other secondary residence in the city.
Some key tax court decisions highlight two main areas that these taxpayers should pay careful attention to when changing domicile status from NYC to another part of the state.
In the Matter of the Petition of Ronald Moss, NYS Tax Appeals Tribunal highlights the importance of a paper trail. In this case, the taxpayer moved from his NYC apartment to a home in Quogue, Long Island and did not file a NYC residency return, claiming he did not spend 183 days or more in the city that year. Despite the fact that his name was on the lease for a NYC apartment provided to him by his employer, the court ruled in his favor because his records supported his domicile status.
The taxpayer substantiated this status by registering his car in Quogue, changing his mailing address, paying utility bills, changing his voter registration, relocating his household staff and maintaining diary entries, among other records. In the end, the court agreed he did not meet the 183-day threshold and was only subject to non-resident tax obligations in NYC. (This was when there was an NYC non-resident earnings tax, which does not apply today.)
In another NYS Tax Appeal case, In the Matter of the Petition of Nicholas R. Doman, the court also pointed to lifestyle changes as factors in determining domicile status. While the taxpayer’s records were also heavily considered, the court specifically mentioned documentation of the taxpayer’s social and community involvement in its decision to rule in his favor.
This documentation included evidence of significant involvement by the taxpayer and his spouse in their Shelter Island, NY community, including participation in local politics, membership and regular involvement in local associations and social clubs, and monetary donations to non-NYC charitable organizations.
When comparing these cases to 2020, it is reasonable to expect that the COVID-19 pandemic will provide an adequate backdrop to prove these lifestyle changes. But the state has said little about how this will play out for NYS residents, despite offering prompt relief to other tri-state area residents on their telecommuting withholdings.
Losing this portion of state income tax from former high-net-worth city residents, will be a major blow to the city, on top of the hit its budget has already taken from residents moving out-of-state, restaurants and tourism stalled, social unrest and all of the other impacts of COVID-19.
If history is any indication, the tax courts will continue to place the greatest emphasis on your paper trail and lifestyle, should you face a residency audit. Careful recordkeeping of all your 2020 activities is essential to prove your non-resident domicile status. In other words, do not expect New York to just take your word for it.