As state and local tax attorneys, the 2017 Tax Cuts and Jobs Act has mixed up our lives. The end of the year used to see a flurry of activity around taxpayers settling audits, making estimated payments, and otherwise ensuring they maximized the federal tax benefits of their obligation to pay different state and local taxes.  Those days—at least for the better part of the next decade—are behind us now.  The future will be replaced with taxpayers wondering what they can do to lower already onerous state and local tax burdens, taxpayers calling and sitting down to talk about what it takes to move (and the audit scrutiny they could face after the move), and a less frantic year-end (we think).

It is true that some taxpayers find the effort required to successfully move out of a state like New York—and the risks of failing to stick the landing in the new state of residence—too great, so they decide to stay put.  In our experience in recent months, many other taxpayers have had enough, and they are leaving.  These taxpayers are following through, perhaps a bit earlier than expected, on long-held plans to relocate around a shift in lifestyle or around a desire to be closer to family or a more attractive climate. If the taxpayer is moving to lower state and local tax burdens, that’s fine.  There’s nothing wrong with moving to save tax—so long as the individual actually moves.  

When taxpayers consider whether or not it makes sense to move out of New York, they should have an accurate understanding of the relevant rules, the tests and checks they will be subject to, and what they might face in terms of New York tax once they establish their residency elsewhere.  Ahead of the 2017 extended tax return filing deadline, this article briefly discusses the key rules and offers some practical suggestions and tips to help taxpayers and representatives make informed decisions.

The Rules – Changing Domiciles From New York

If a taxpayer wants to stop paying tax as a New York resident, the first hurdle to clear is changing domiciles.  Taxpayers domiciled in New York are subject to full New York State tax on their worldwide income (and New York City income tax too, if the taxpayer’s domicile is there).  There are two statutory exceptions to this rule (the “30-day” and “548-day” rules), but they are limited, and assuming a taxpayer is actually considering moving somewhere else, outside the scope of this article. (For more on these exceptions, see New York Tax Law section 605(b)(1)(A).)

A taxpayer’s “domicile” refers to his principle, primary, and permanent home.  A person can have many residences, but only one domicile.  For taxpayers historically domiciled in New York (and considering making a move), the law places the burden of proof on the taxpayer to prove, by clear and convincing evidence, that at some point the taxpayer abandoned the historic New York domicile and established a new domicile elsewhere.

We call this the “leave and land” rule.  A taxpayer who succeeds in leaving New York but who does not sufficiently set down roots—and establish a new domicile somewhere else—will continue to be taxed as a New York resident.  A taxpayer’s domicile will continue in New York unless and until a new domicile is established elsewhere, and in the meantime, the taxpayer’s domicile reverts back to New York.

So, what does a taxpayer need to do to change domiciles?  New York’s highest court set out the standard over a century ago: “Motives are immaterial, except as they indicate intention.  A change of domicile might be made through caprice, whim or fancy, for business, health or pleasure, to secure a change of climate, or a change of laws, or for any reason whatever, provided there is an absolute and fixed intention to abandon one and acquire another.” The key here is the taxpayer’s intention to be domiciled in a certain place, and the actions taken by the taxpayer to reinforce the intention.

I.  Practice Pointer: Changes in Domicile Often Occur Around Shifts in Lifestyle

Domicile changes are often the strongest when they occur in conjunction with a shift in lifestyle.  Did the taxpayer retire or change roles at work?  Did the taxpayer transfer offices?  Did the taxpayer have a health scare?  Did the taxpayer go from spending 40 days per year in Florida to 190 days?  Actual change around a claimed move bodes best for the taxpayer’s chances of success on audit.  These inquiries with a client often lead to another important consideration: determining the exact date the change of domicile occurred.  A taxpayer’s domicile changes when the taxpayer arrives in the new place with the intent to remain indefinitely, to make it “home.”  Taxpayers typically do not move on Jan. 1 (a holiday), even though it is common to go from filing as a full-year New York resident to full-year nonresident.  Work together with your client to determine the exact date the domicile change occurred, and prepare the New York part-year or full-year nonresident return around this date.  If for some reason the taxpayer is filing a full-year resident return during the year his or her domicile changed, the taxpayer should add a statement to the return briefly noting the date the change occurred.

The New York Tax Department has established a set of five objective factors its auditors examine and compare in order to determine a taxpayer’s subjective intent regarding his or her domicile.  The five factors involve a comparison of a taxpayer’s home, business, time, possessions, and family ties in New York and the new state of domicile (let’s assume Florida for now).  In reviewing the primary factors, New York auditors will look at the extent to which the taxpayer retained ties in New York after the claimed move and whether the taxpayer’s actions indicate an intent to abandon the historic New York domicile and acquire a new domicile in Florida. 

The taxpayer’s case is often won or lost under the “primary” factor analysis.  No one factor is determinative, but allowing one factor to remain materially pointing towards New York can be troublesome picky auditors.  Other “secondary factors” are also reviewed, such as the state of the taxpayer’s driver’s license, location of bank accounts, where the primary physician is located, etc. – but these are actually less important to New York auditors.  The focus instead is on the strength of the taxpayer’s case under the “primary factors.”

II.   Practice Pointer: Do Not Conflate the Importance of the “Other” Factors

When undertaking a change of domicile, a taxpayer should be armed with a hearty checklist of all the ties to formally sever back in New York, and to re-establish—or to establish for the first time—those same ties in the new state.  But these “checklist” or “other” factors do not prove, in and of themselves, the taxpayer’s intention or the date the change occurred.  The taxpayer and advisor should be more focused on the five “primary” factors noted above.  The strength of the taxpayer’s case under the primary factor analysis is more important.

Understanding the rules to change domicile, the weight – which can sometimes feel heavy – of meeting the required burden of proof to complete the move, and the ways in which a taxpayer can prove his or her intent is so important because of the significant likelihood for some taxpayers of a New York residency audit after the move is complete and reported.  New York residency audits can be invasive, lengthy, and expensive.  Taxpayers who take care at the beginning to understand the requirements to complete the move stand a better chance of success on audit—and also a better chance to save money, time, and stress on audit, possibly making the move “worth” it.

III.  Practice Pointer: Understand the Ins and Outs of the Audit Process

The authors have previously written on what to expect during a New York residency audit, and the process is often evolving with new audit policies, case law, and advances in technology that change how taxpayers meet their burdens of proof.  For more information on this process, see the authors' January 2017 article in The CPA Journal titled “A Snowbird Must Carefully Plan its Flight.”

More Rules – Avoiding New York Resident Taxation after Changing Domiciles

New York State (and New York City) have a separate test that can result in individuals paying tax as New York residents even if their domicile is firmly established someplace else.  The specific terms of this test changed this year (see New York Tax Law section 605(b)(1)(B)), but the thrust of the rule is the same.  If a taxpayer (1) maintains a permanent place of abode (“PPA”) in New York for substantially all of the year and (2) spends in excess of 183 whole and part days in New York during the year, the taxpayer will be subject to New York resident income tax as a statutory resident, regardless of where his or her domicile is located.

New York’s statutory residency test, sometimes called the “183-day” test, is a year-by-year analysis.  Remember that part days in New York, with very limited exceptions, count as full days for purposes of this test, and the burden is on the taxpayer to prove his or her location throughout the year on a day-by-day basis.

IV.  Practice Pointer: Do Not Confuse the “183-day” Test With the Domicile Rules

Sometimes taxpayers mix up New York’s two different avenues for imposing resident taxation: Domicile and Statutory Residency.  The test used to determine if a taxpayer has changed domiciles out of New York involves a comparison of five “primary” factors and several “other” factors, with a comparison of the taxpayer’s “time” in New York and the new state of domicile considered one of the five primary factors.  So, for domicile change purposes, “time” spent in different locations is often very important, but there is no magic amount of time needed to succeed or a “speed limit” to stay under or over in order to prove a change of domicile.  By comparison, the 183-day statutory residency rule offers a bright-line test to avoid New York resident taxation, so long as a taxpayer does not spend in excess of 183 whole or part days in New York.  When planning a change of domicile and keeping track of time after the move, keeping the tests and the rules applied to each base for resident taxation straight is important.

After the Move – Was it Worth It?

Let’s say a taxpayer successfully moves from New York to Florida and avoids being taxed as a New York statutory resident thereafter.  Congrats!  This is where the rubber meets the road, in large part, to determine if the move was worth it from a tax savings perspective.

If the taxpayer derives a material portion of income from sources connected with New York (or from another state with a material income tax, such as California, New Jersey, or Minnesota), he or she will still be subject to New York nonresident taxation on that income.  Income subject to New York nonresident taxation includes wages earned for services rendered in New York (or, sometimes, for services rendered outside New York (see TSB-M-06(5)I, May 15, 2006)); flow-through income from a business carried on in New York; and income from the sale of New York real or tangible personal property; among others. When planning or projecting state and local taxes after a move to a state with low or no income tax, keep these considerations in mind.  If a taxpayer does not expect significant tax savings given the income complexion, perhaps the utility found in moving—at least right now—will not be worth the effort required.

V.  Practice Pointer: No NYC-source income, and the Accrual Rule

There is a significant wrinkle to the potential tax savings inherent in a move out of New York.  New York City’s personal income tax is premised on residency only.  So, after moving out of New York (and avoiding statutory residency), a former New York City resident will no longer owe New York City personal income tax, even on income subject to New York State nonresident taxation.  When analyzing the taxpayer’s New York State and City tax burden post-move, also keep New York’s “accrual rule” in mind.  It is possible under New York State and New York City rules that income—not otherwise New York-source—can be subject to New York State/City resident taxation, even if received while the taxpayer is a nonresident.

This article is a primer on New York’s residency rules and some of the common strategy and planning points we encounter.  Every taxpayer’s facts are unique and require special attention and consideration when planning a move.  As we have found over the years, planning a change of domicile out of New York before executing the move often provides for the best chance of success on audit.