Our Private Client Services team has seen more clients than ever before change or plan to change their state of tax residence from the tristate area to low-income-tax or no-income-tax states. We find that many taxpayers assume that changing their “tax home” is as easy as spending less than six months in their current state or changing their driver’s license.
The reality is this: Tax residency is complex and involves a number of rules and factors that tax auditors use to claim former residents never changed their tax home. New York, in particular, is known for aggressively pursuing tax residency audits.
First, it is important to understand the definitions and factors of tax residency so that residents can properly plan their relocation. New York’s Nonresident Audit Guidelines define a tax resident as one who is domiciled in New York state, or one who is not domiciled in New York state but who maintains a permanent place of abode in the state for substantially all of the taxable year and spends more than 183 days of the taxable year in the state. Such a person is referred to as a statutory resident.
Domicile is defined in the guidelines as the place that an individual intends to be his or her permanent home— the place that the individual intends to return to whenever the individual may be absent. When determining a taxpayer’s domicile, New York looks at primary factors first and “other factors” next. Primary factors include the home’s location, the individual’s active business involvement, the individual’s time spent in the state, where items “near and dear” to the heart are kept, and family connections. Other factors include, in part, the state issuing a driver’s license and the location of vehicles, where the taxpayer is registered to vote, and the address used for bank statements and bills.
Regarding New York statutory residency: Before tax year 2022, “substantially all of the year” generally meant a period exceeding 11 months. Beginning with tax year 2022, this has changed to exceeding 10 months. This is a small change that could have significant impact on taxpayers relying on this nuance to avoid being a New York statutory resident.
When planning to change the tax domicile, it’s important to know that it is based on facts and circumstances, so having as many primary and other factors as possible in favor of the new tax home is crucial. Keeping contemporaneous documentation is equally important. Tracking and documenting where an individual is spending days as they occur is much easier than trying to re-create the calendar with substantiation up to three years down the road.
Documenting lifestyle changes that support “leaving and landing” in the new tax home is crucial. For example, selling or renting out a New York home and buying a home in another state is a significant factor in favor of changing domicile, as are changing office locations and moving pets and valuable artwork and jewelry.
Proactive planning is the best strategy for New Yorkers considering changing their tax residency. The best piece of advice: Consult a tax adviser early and often to create the plan and documentation needed to accomplish goals.
This article originally appeared in the July 11, 2022 issue of Crain’s New York Business.