It's Not Just about Homes

Published Date:
Feb 4, 2014

Most residency taxation issues appear to be about where a dual-household taxpayer really lives, but that's not the only possible problem. In Advisory Opinion TSB-A-13(9)I, the state addressed the question of where the income comes from, specifically when it's an insurance payout. The answer proved to be particularly complex, and especially illustrative of the state tax department's insights.

From 1998 to 2010, the petitioner was a New Jersey resident, working in the New York City offices of his multinational employer. In 2010, the petitioner suffered a stroke and could not return to work. For six months he collected short-term disability benefits from his employer; he treated these benefits on his New York state income tax returns as New York sourced income. Subsequently, the petitioner started collecting long-term disability benefits under a noncontributory disability insurance policy. The employer paid for all of the premiums for this plan. If the petitioner can never return to work because of the stroke, he can collect the disability benefits until 2016, when he will be eligible to collect his employer's retirement benefits and Social Security.

The question is whether the long-term disability benefits the petitioner is receiving under his noncontributory insurance policy are New York-source income subject to New York state personal income taxes.

Deputy Counsel Deborah R. Liebman began her analysis by explaining that generally, nonresidents are subject to New York income tax New York-source income that enters into the federal adjusted gross income (FAGI). She then clarified that New York adjusted gross income (NYAGI) included income that entered into FAGI and that resulted from business carried on in New York. NYAGI includes compensation paid to a nonresident individual for personal services rendered in the state if the compensation is included in an individual's FAGI.

First the Details…Now the Questions

By defining the terms, Liebman was able to ask two detailed questions that would allow the Office of Counsel to present an answer to the petitioner: were the long-term disability payments New York-source income, and if so, were they subject to state income tax?

The answer to the first question is "yes": the petitioner enrolled in the disability plan while working for his employer in New York, so the benefits are New York-source income. These will be taxable "to the extent such benefits are included in his FAGI," Lieberman wrote. But are they? Liebman said that generally disability benefits paid pursuant to a noncontributory insurance policy would not be included in FAGI unless the amounts are attributed to contributions by the employer which were not includible in the petitioner's gross income, or were paid by the employer.

It sounds confusing, made more so because the advisory opinion notes that although the employer paid all the premiums, the petitioner did not say whether or not the premium payments were includible in petitioner’s federal gross income—and that makes all the difference. Liebman said that if the premium payments—which were made by the employer—were not includible in
petitioner’s federal gross income, then the benefits received will be included in petitioner’s federal gross income and flow through to his NYAGI. Thus, they will be subject to New York state personal income taxes.

If the distinctions on premium payments seem almost arbitrary, Liebman cites federal guidance on premiums in such situations: IRS Rev. Rul. 2004-55. It's worth a review by any CPA involved in insurance issues.

The lessons here are multiple, even though this opinion, like all opinions, is applicable only to this situation. First, residency issues are about more than where your vacation home is; they can affect other aspects of a taxpayer's financial life. Second, insurance laws and regulations are complex. And three, always be sure to give the Office of Counsel all the details—to avoid a conditional answer as was necessary here.

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