Changing your tax residency is not as simple as packing your bags and moving into a new house. There are important considerations that you have to think about, especially if you want to avoid a heavy tax burden. Helping you navigate the world of relocation and the tax implications thereof, Chas speaks to Daniel Kelly, the senior associate in Hodgson Russ’ Tax Practice. In this episode, Daniel sheds light on the things you need to consider before changing residency to reduce your tax burden, regardless of what state you live in. He goes deep into the concept of taxpayer’s domicile, providing a checklist that spans the individual’s lifestyle changes and their family and more.
The summary below has been created by a professional transcription vendor upon review of the recorded presentation. Please excuse any typos as well as portions noted to be inaudible.
On the Wealth Cast, we share information that you need to know to be a good steward over your wealth and enjoy the luxury of financial independence. My guest is Daniel Kelly, a Senior Associate with Hodgson Russ, where he focuses on tax issues, including our topic that concerns establishing state and local tax residency. I hope you enjoy the show.
Dan, thanks so much for joining me to talk about relocation and the tax implications thereof. I appreciate you being here.
Thanks, Charles. It’s my pleasure.
Why don’t we start at the 60,000-foot view and talk a little bit about the considerations that almost anyone might want to have regardless of what state they live in before they change residency in the effort to reduce their tax burden?
Whether you’re high, medium or low income, there are important considerations to think about in terms of changing residency. Our discussion is focusing on the state and local impacts of your residency. There are a number of attendant repercussions that could flow in. The key concept across almost any state in the country that has an income tax. Most states do, several states don’t and that makes things interesting. Every state that has an income tax follows the concept of a taxpayer’s domicile. It may not be the reason of taxpayers are taxed in that state, but it’s a critical concept in nearly every state. The domicile concept is that you can only have one domicile. It’s your principal, primary home, the place you intend to return to when away. You can have ten residences across the country or across the world, but you can have only one domicile. For most residency analyses, whether it be in New York, California, New Jersey or Arizona, we’re going to want to know where the taxpayer was domiciled. The rules for establishing domiciles and breaking domicile and who has the burden of proof, we’ll get into the nitty-gritty in a bit.
The first most important concept is I have a domicile and I want to change that. What do I need to do to effectively change it? If I effectively change it, are there still attendant residency tax risks, either back in the state that I have left or in a different state? The answer is yes because while domicile is very important, certainly, states are not constrained to only subjecting taxpayers who are domiciled in that state to resident income tax. Several states have proffered statutory residency type tests or surrogate residency tests that would impose resident income tax on a taxpayer who is not in fact domiciled in that state, but who has established a presence in that state sufficient to impose the income tax. I’ll give you a couple of examples to get us primed here. You’re assuming for a second that you’re a taxpayer domiciled in New York state. There are nineteen million of those people who are permanent primary residents of New York and you begin spending time in California. Your time in California is not for a narrow and specific purpose.
You’re in California indefinitely. You’re spending most of your time in California. You bought a home in California. You’re working in California. You’re there for a few years. All of a sudden, the rules in California would say it doesn’t matter if you’re domiciled in New York. If you are in California for other than temporary or transitory purposes, then you’re a tax resident in that tax year, even though your domicile state is back in New York. Now this person who is making their primary home in New York, has a New York driver’s license, registered to vote in New York, maintains their primary home with all of their stuff in New York. Maybe the spouse is back in New York. All of a sudden, they could be facing double taxation. That set of facts can be present between New York and California, between California and Arizona, between New York and New Jersey, New York and Connecticut.
The states have different rules. If you’re either not aware of them or if you’re not properly planning to make sure you don’t fall into them, you can wind up double taxed. If you’re not double taxed, perhaps you’re still taxed when you thought that you wouldn’t be if you failed to change your domicile from a high tax state to a low tax state. If you attempt to leave on July 1st of 2020, but in fact, the revenue department thinks you left on December 30th or 31st, and all of a sudden there’s a gain event in there that gets picked up. It requires very careful planning to properly execute a change of residency. To make sure that once the change is complete, you have an audit file and you have the documentation necessary to prove your change, to prove your location in order to defend what is a pretty significant shift. If someone’s moving, it’s properly viewed as a big significant lifestyle change. Auditors and revenue authorities expect to see what shift in a taxpayer’s patterns consistent with that change.
The change has to be a lifestyle change as well as where you’re sleeping at night.
The other thought that I’d note is this concept of what event or what action causes someone to change domiciles? It happens on a discreet date at a discreet time. The key is actual residence plus intention. Residence without intention in any location doesn’t change your domicile. You could be there for ten years, but if you didn’t intend to make it your domicile, then you wouldn’t change your domicile. Residence being in this new location plus intending to make that place your permanent primary home of an indefinite duration. If you expect to stay for two years, that doesn’t cut it. Your domicile stays where it was. If you have an intent to remain indefinitely and you’re there, you can still go back to where you came from. We can talk a bit about some limitations on that.
If you have residence plus intent, you change your domicile. It’s one of these things where we would advise taxpayers if they’re thinking about it and planning around it to try and bolster their case and to demonstrate through their actions that they’re intending to make their home in a new location. At the same time, in New York and elsewhere, taxpayers without perhaps perfect facts or with facts that may still favor the state that they were formally domiciled in can still prevail if they have the requisite intention. If they can demonstrate that intent through actions, through testimony, through evidence that despite what on paper might look like a retained domicile in state acts, their domicile changes state because that’s where they intended to make their permanent primary home.
How do you measure intention? I understand it’s easy to measure where you’re sleeping and those sorts of things, but the intention, what goes into that? What’s considered part of the intention?
It’s part of what makes this work tricky. Intention is necessarily subjective. It’s what’s in a taxpayer’s heart and mind. Those are things that are tricky to pull out on paper, through an insurance policy or through a photocopy of a driver’s license, through Verizon wireless cell phone statements. Those documents may not a taxpayer’s true intention regarding where they want to make their home and their true primary domicile. A lot of states have set up objective factors and standards of review in an effort to use those objective factors as a means to try and determine a taxpayer’s subjective intention. A good example would be in New York state. Like many states who are subject to the Northeast State Tax Alliance, New York uses essentially an agreement of several Northeast states that came together to try and standardize and formalize this residency concept of having your one true domicile and then a statutory residency test, which is based upon this number of days you spend in a state plus maintaining an abode there. The factors in New York would look at a comparison. Assume you move on July 1st, 2020, from July 1st, 2020 forward, whatever the period of review is, they would look at what’s changed.
They would try and compare your homes in New York and in Florida. Me moving to Florida is a very typical example. The market value, the square footage, the amenities, and how you use the homes in each day. They’ll look at a comparison of your time and time is both quantitative and qualitative. You’re looking at the gross number of nights, days, whole and part days. You can look at that in different ways in New York and in Florida, but also the quality of that time. Where are you doing anniversaries, holidays, special occasions, birthdays? If you’re traveling on foreign trips or on vacations domestically, where are you going back after your travel? Are you going back to New York every time or are you going back to Florida? Those kinds of things within the time factor. New York is looking at a comparison of your active business connections in New York and in Florida.
They’re looking to see if you retired. Is there a lifestyle change? That is the impetus or that is the key element in this decision to move in the first place. Why are you moving? Everyone moves for a reason. It’s good to be able to explain that to an auditor why the situation is occurring as it’s playing out and when. The fourth factor is a comparison of your family ties. Families should only look at your spouse and minor children, but it can also encompass in this day and age a broader array of relationships where children live, where grandchildren live, where parents that you care for live, those kinds of things. Finally, a comparison of your items near and dear. Where’s your meaningful stuff? Not your couches and tables and lamps. No one cares about that, but the items that have intrinsic sentimental or monetary value to you. Where are those items?
What a New York auditor and what an auditor generally would expect to see varies every case. There is not one set of facts that is right or wrong because taxpayers are also different in how they live and how they would in fact move. On balance, the idea would be we want those five factors to point in a clear and convincing way towards Florida. Those objective factors pointing towards Florida that the auditors can then use to rely on in degree that the taxpayer’s subjective intent was to live in Florida and make the home there. You didn’t hear me talk about things like a driver’s license or a voter registration, or getting the homestead exemption in Florida or joining the library in Florida, those kinds of things. They’re very important to take care of those steps and actions because they add value and they reinforce the timing and your intention to change domicile.
At the same time certainly, the five primary factors in a New York review and in other states reviewed similarly, every state has its own different take and spin on it. The primary factors are where the bulk of the energy during a residency audit is focused. It’s where a taxpayer would be wise to focus their efforts to try and prove the change. You can get your driver’s license, but if you don’t make your move official under those five primary factors where a comparison of your real-life connections would point towards Florida, you may face a challenge on audit and that ends up being pretty difficult.
It’s clearly not a simple checklist. It has to be considered in terms of the lifestyle of the individual and the family, etc. It’s not just get your driver’s license, stay there 180 nights, whatever the case may be. It’s much more subtle and fine-tuned than that.
It’s specific. Every taxpayer has something going on. They have a unique set of facts. They have mitigating facts. If there’s something that’s different or unique, you want to figure out how to document it, how to explain it, how to rationalize it to address it in the context of potential audit or some dispute that could arise. One of the points to mention about at a high-level is residency concepts. I mentioned that there’s this concept of domicile that’s very important. There’s this concept in California and in Illinois and some other states of this temporary or transitory purpose. You can be taxed there if you’re there indefinitely without changing your domicile, but you’re in that state or your connections are closer in that state than they are in your state of domicile.
The other key thought there is this statutory residency. Many people have the thought in their minds that, “If I spend a certain number of days outside of New York or New Jersey or Connecticut, I’m not a resident.” That might be true, but domicile in statutory residency work together, but they’re not the same task. Domicile is time is one of the factors. I mentioned several factors. Time is one you have to consider. Ideally, you’d like to see more time in this state you’re living in than the state that you’re moving from. If you are domiciled outside of New York, Connecticut, New Jersey, Massachusetts or Pennsylvania, there’s a rule that says if you’re domiciled elsewhere, but you maintain a permanent place of abode in this state, in New York, for example, or in New York City, which are two separate tax jurisdictions.
If you maintain a permanent place of abode in New York City and you spend an excess of 183 whole or part days in New York, then even though your domicile is somewhere else in a lowered or no tax state, you’re fully taxed on your worldwide income to New York State and to New York City. That is the speed limit. It’s a bright-line test. If you have an abode there and you exceed the day count threshold, and any part of the day can count as a day with pretty narrow exceptions. There are exceptions, but they’re narrow. All of a sudden, you’re facing tax in that state, despite the fact that your domicile, your primary residence is somewhere else. Sometimes those rules are conflated. It’s typically taxpayers who have completed a move that understand the difference, but before the move, there might be some misinformation out there about, “If I spend a certain number of days outside of the state, then I will prevail or succeed in being a nonresident. In some states that may be true, but many states in the Northeast in particular where there’s a lot of activity and taxpayers moving, it’s not that simple. You must change your domicile and then count your presence and count your days.
Otherwise, it sounds to me as a gross oversimplification. It’s easy to get advice where you hear a snippet from someone and you hear something about a number of days you have to be out of the state, etc., but it’s much more complicated than that. That’s clear. In many cases, you have an individual who is thinking about retirement. Let’s use New York State as an example. They may live in New York State. Do you have thoughts on whether they should establish domicile outside of New York prior to retirement, after retirement, or is that one of the many moving pieces? How do you view that?
My view is retirement is an excellent point in someone’s life to sever a historic domicile because for the first time in maybe 20, 30 or 40 years, you’re able to live wherever you want to live. Your day-to-day location is not tied to a desk or an obligation or a business right down the road. You’re a free agent. In some ways, it will depend on what the taxpayer wants to accomplish. Does the taxpayer want to work in retirement? Does the taxpayer want to continue working and set up an office in Florida? Do they want to go incorporate an LLC to continue operations from Florida? Do they want to maintain the Florida branch office?
Some people will want to pivot and expand their business if it makes sense from a business perspective. Other people are like, “I’m done. I’m out. I’ve put in a long career. I’m happy with what I’ve accomplished, I’m ready to go.” They may move the day after they retire or the week after they retire. It’s very common to see people retire and then move. There are often considerations that taxpayers need to think about and they make sense to think about where you may be expecting to earn $1 million or $2 million or $3 million in retirement from qualified retirement plans, non-qualified retirement plans, ordinary gains, interest, dividends and capital gains, board service fees. Maybe some occasional gambling, winnings, whatever income you might generate in retirement or losses, there might be something big on the immediate horizon around a retirement or around a sale event.
Going back to decades ago from the Supreme Court of the United States and carry it on down to cases across the country, it’s okay to manage your tax affairs in a way that reduces the tax within the bounds of the law. You have no obligation to pay the IRS or New York State or any other state more tax than the law would require. If you effectively and successfully change your domicile prior to earning income, you can potentially save a significant amount of money depending on the source of the income and the character of the income. Some people will see potentially an income event coming and determine that whether or not it’s going to happen, whether it’s 1, 5, 10 years and determine that they don’t want to be a resident in a state that would tax that at a very high rate.
They’ve already paid a lot of tax in that state, for example, and they may move prior to that sale event. That’s everyone’s prerogative to do that. Part of the reason that audits can be focused on these issues are because the states want to make sure that you change your residency correctly. You’re going to not pay any tax on your retirement gains, your retirement payments, whatever gains you might earn or accrue or generate in retirement or after you’ve moved. It’s a way of saying that there is no right answer. Having that significant lifestyle shift creates an excellent springboard upon what you could move into changing your domicile. You could move, but also people need to be thinking about, “If I’m going to make $4 million in the first year after my retirement and whatever payments I might receive, first of all, am I still paying tax to New Jersey on that payment because I earned it all in New Jersey? Is it something that would not be taxed as an intangible that I could not pay tax on only subject to my state of residence down in Florida?”
There are those types of questions and also questions of if I do move and I do change my domicile and I’ve retired, what are the potential savings? Certainly, there may be even estate tax considerations if there are not income tax considerations. I’ve been talking about current year savings, the State of New York has a significant estate tax. The State of Florida has no estate tax. Many people may be driven by the idea that, “I have control now in retirement, I live wherever I want. Maybe I won’t save any money and I’m still paying New York significant tax on my holdings there or whatever income I may generate. There may be an opportunity to avoid a significant estate tax within the bounds of the law by moving and making my new home in Florida.” Those are the things for people to think about.
The payments that might come in in the first couple of years after retirement that you were referencing could be deferred compensation and all those sorts of things that may come along with retirement. Is that what you’re referencing there?
A common set of facts is you work for a company for twenty years and you retire. You separate from service and you receive a severance. You continue to invest and continue to earn income with restricted shares and non-qualified stock options. You have a non-qualified deferred compensation plan that may be subject to the federal protection of only being taxed in your state of residence. You may have a qualified retirement plan or stream of income, a pension, a 401(k) distribution, whatever you might have that also will only be taxable in your state of residence in retirement. Some of that income, you might not pay any tax to New York, New Jersey, Connecticut or wherever you’re coming from, but others, for example, the RSU is the non-qualified stock options, there might not be a true 100% savings there.
You might be allocating a significant chunk of that income even received as a Floridian back to New York or back to New Jersey or Connecticut based upon the workdays in prior periods. Residency is very important. The final shoe to drop in an analysis like this is a determination of whether or not your income received as a nonresident, once you’ve been agreed to have moved is taxable in the state that you came from or another state or states based upon a sourcing in that state even after you’ve moved.
In your experience when you’re brought into situations where people have moved and thinking that they’re changing a domicile and it’s doing all the things they should be doing, is there any common mistake that you see made? Is there misperception or anything that you would like to heighten the reader’s sensitivity to when they’re considering these changes?
If you’ve attended one of my speeches, you may have seen a top ten list or something of some things that we see that maybe send the wrong signals. The truth is in many cases, people are not appraised of all of the rules like we are or like the tax department is in whatever jurisdiction they’re coming from. Ideally, they shouldn’t be torched for maybe missing or having a footfall here or there, but things that we’d be on the lookout for. January 1st is a natural recycling date for a tax return. What we often see is that a taxpayer goes from filing as a resident for a full year, let’s call it 2019, to a nonresident effective in 1-1-2020 for the full year of 2020.
The truth is they changed their domicile on October 17th, 2019 or whatever date. March 22nd, 2019, they changed their domicile out from New York to Florida. For whatever reason, they may be filing a full-year resident New York tax return. Maybe it sends a little bit of the wrong signal where you go from having this full-year resident return to full-year nonresident return. You didn’t do anything different on January 1st. You woke up in Florida, went and got breakfast. You didn’t get a driver’s license. DMV was closed. You didn’t get registered to vote, the Secretary of State’s office was closed. The idea is that people will sometimes use January 1st as a natural point of demarcation. A better play is to try and be as accurate as you can on your tax return. Also, in the preparation of your move. Dropping a statement on there or filing as a part-year resident using as a resident from 1-1-19 to 10-17-19, and then as a nonresident thereafter. Those are the small things to keep in mind and an important thing. If you don’t do that, it’s not that big of a deal in my view, because honestly you probably thought, “I’m going to be conservative and go from this full-year forward,” or you want other tax software that pushed you into this model of going in a full-year resident to full-year non-resident return. That’s one to keep in mind.
Another one is this is technical but it’s important. It’s an interesting concept to raise with people who might be under the misconception that if they move and then get paid, they’ll avoid paying tax to New York on those payments. Maybe they’re right. Maybe if you do move and then receive streams of income, you will avoid some or all New York tax based upon the fact that many taxpayers are cash basis and they only pay tax when the income is received. Let’s use 2020, for example. If in 2020 you change your domicile from New York to Florida, you are shifted under the New York tax law from a cash method of accounting to an accrual method of accounting. The idea there is that you determine as of the date you move out what items of income would accrue under federal concepts of accrual taxation which is, have all events been met, which fixes the taxpayer’s right to receive that income? Can they tell with reasonable certainty the amount they’re going to receive?
If you’ve answered both of those questions yes with assumed income that you have not put in your pocket yet, but that you will receive in the future. For example, you have an installment sale payment coming in the future that you haven’t received yet from selling something 1 or 2 years before, or a sale is effectively closed and everything is done. You’re just waiting on a payment. The payment comes in and you’re a Floridian. It’s possible that New York would still be able to tax those payments received as a nonresident under this accrual concept. It’s an important thing to keep in mind. It’s a cliché, but we call it the accrual rule, which can be a cruel rule because people may not be ready for it when it’s set up like this.
I wanted to keep in mind too and we’ve seen a number of cases come out that way. In the accrual rule, if the deal hasn’t closed, if you haven’t sold your house yet, if you haven’t sold the business, if the income is not fixed, and if all events have not occurred which fix your resident income. You don’t know what you’re going to receive, if it’s a publicly-traded stock, which can fluctuate every day, it won’t accrue. It’s one of these things where people thinking about this in a way that otherwise might seem straightforward, it might not be. In that year you move, your method of accounting shifts. Using that January 1 example, if you go from being a full-year resident in 2020 into a full year non-resident in 2021, the accrual rule is a full calendar year basis.
They mark it at the end of 2020 is when they would test it. It’s one to keep in mind. It’s one that if you’re savvy and thinking about how this could impact you, it’s one something the taxpayer should think about. That’s one that pops up. Honestly, the biggest thing is this idea of counting days. People may not realize that if you go to bed in New York on Saturday and wake up in New York on Sunday at 4:00 AM and drive to JFK and fly to Florida, that’s two days in New York. When people are counting days, they might not appreciate that. They might count Saturday, but not Sunday. If you’re coming in from Pennsylvania and you go to New York for a business meeting and you’re there for two hours, that’s a day in New York. That comes up time and again where people may not be fully appreciating what a day in New York would mean for that 183-day test and they’re surprised on the backside. That’s one that can be avoided by understanding that any part of the day is a very broad concept.
From my perspective, and correct me if I’m wrong, that error would seem to be fundamental and one that is likely to cause more problems than one of filing on January 1st rather than October 17th. Is that a fair statement? Each one of these has a different order. There are different orders of magnitude in terms of these things.
The days issue is one that pops up. It’s a pretty common set of facts. The rules are confusing and it could be that there would be better bright lines or a full calendar day or a period of twelve consecutive hours. Different states have different perceptions and conceptions of what counts as a day in the state for residency purposes. That’s a big one. That could be the difference between filing as a resident or as a non-resident based upon the number of days in New York. Whereas if you have a possible issue on a tax return because you haven’t maybe expressed the exact date of a move, that’s one that’s probably easier to maneuver around or to prove and demonstrate that it may not be what the taxpayer intended. It’s counting days. That’s back to that concept of it’s a bright-line standard. If you’re over 183 in New York and you have an abode there, or over 183 in New Jersey and you have an abode there, you’re a resident, notwithstanding wherever your actual domicile might be.
Those number of days trump everything else. From your perspective in terms of timelines, is there a guideline in terms of the amount of time that’s required to establish a domicile besides the 183 days in that example? In terms of all the other things that you need to do that might make your case stronger from that perspective of time.
The answer is yes. With regards to the time concept of changing domicile, there are two things to think about. One is that your domicile changes, as I mentioned at the beginning, as of the moment you arrive in the new place, but the intent to make it your permanent primary home. That could last for one week. It could last for the rest of your life. As long as your intent was to make it your home in that moment, your domicile changes. There are cases that say exactly that. It’s like, “Residence with that intention, you never change domicile.” Even residence for 1 or 2 weeks effectively change your domiciles. It’s not so much from a temporal perspective. You can change your domicile very quickly. You can change it over the course of 2 or 3 years, creep the change in and get comfortable in a certain area, and take your time. Some taxpayers go that way. Other taxpayers are about to Band-Aid and they’re gone. In terms of how much time you would maybe be expected to spend in a given state after you’ve moved, because a lot of taxpayers are keeping their homes where they formerly lived. They’re downsizing into a condo or they’re going to their vacation home. They got rid of their primary residence. Taxpayers are keeping their homes and there’s no set rule. Taxpayers have won and lost cases with different time patterns over the course of the last several years.
What I would say is if you can spend materially more time in the state where you’re claiming to be domiciled than the state that you have moved from, you could substantially improve the likelihood of a successful audit or a successful appeal in the event of an eventual review of your change of residency. Materially more, what does that mean? It could be two days in Florida for every one day in New York. It could be if you spend 150 days in Florida, maybe spend 100 in New York. The time factor is not the only thing considered. It’s reviewed as part of this factor test of comparing your facts with your home, your time, your business, your possessions, your family, and all these things.
For some taxpayers, it might be a very strong factor. For other taxpayers, it might be closer to 50/50. The standard of review in New York and in other states is that the party with the burden of proof is the party asserting the change. For example, if a taxpayer is asserting that they moved from New York to Florida, that taxpayer bears the burden of proof to demonstrate by clear and convincing evidence that they’ve changed their domicile. Clear and convincing is not a 50/50 standard. It’s murky and it’s not deployed in many types of legal actions. It’s a preponderance of evidence. You think about your standard civil litigation where 51% would do it for the plaintiff. Beyond a reasonable doubt effectively is the standard in criminal cases for the government to prove.
It means that there is no doubt as to the guilt of the individual charged. We’re somewhere between that with the clear and convincing concept. A tie would not bode well for the taxpayer necessarily, although a tie could still be overcome in terms of your facts with credible testimony and evidence of your intent because at the end of the day, intention is so important. I know it’s like, “What does intent mean?” It would benefit a taxpayer to be careful and thoughtful with regards to their facts and actions to demonstrate what they’ve done to change their residency. At the end of the day, a taxpayer’s thoughts, their desire and their plan, some people have this in their minds for 10 or 20 years.
They’ve thought about it every day for a decade and they’re finally there now. They execute it and then an audit comes along and someone challenges them without ever talking to them or seeing them or knowing who they are. That’s tough to take. Taxpayers can overcome tough situations, but the best idea if you have the luxury is to think about it going in, to plan appropriately and to figure out, “Where are my strong points and weak points? What can I do to potentially demonstrate that I’ve effectively changed my residency? Once I’m gone, what’s my domicile? When I was out of New York, for example, what do I need to do to make sure that I don’t inadvertently fall prey to this statutory residency concept where I’ve spent too many days there?
That seems clear from this conversation. What you’ve pointed out clearly is this is not something you wake up one morning and decide to do. This is something that you’ve got to give some consideration to, depending on where you live, of course. It’s the murky part of the more subjective evidence combined with the residential requirements, the actual nights in the new location. That’s not as cut and dry as many people would think it would be, at least from my perspective. As a result, it cries for planning well ahead and then executing clearly through that process.
I had a client ask, “What’s the amount of time I need to plan?”. There’s no magic number. It could be two weeks. It could be a year. It depends on you and your facts and getting your ducks in a row. Moving is very tough. Things pop up and setbacks can arise. Finding the right home, the right school, the right location, all of these things can take time even if you think that you have it locked cold. The answer in my view is there’s no magic number. We could do this in two weeks. We could do it in two years. You would benefit yourself as a taxpayer and as an advisor to give yourself as much runway as you can, to think through the options, understand the rules, think about different sets of facts and alternatives. Understand what the repercussions might be from a tax perspective if you move.
Some people would be surprised that they’re not going to save as much money as they think based upon the fact that they have no income source to the states that they’re leaving or the states that have an income tax. You’re exactly right. It is not something you do one day and wake up and go. Some people do that, but those are very easy cases. If you cut and leave, it’s a case that you are likely to win. There are cases where you do retain ties back in your historic state and that requires more thought and more planning.
I’ll quickly add one other thought on your question of how are people surprised or what are the issues that you see pop up time and again? What is this concept of leaving and landing? It’s a very important concept in a domicile analysis. It’s this idea that it’s a two-part test. To change your domicile, you must both leave and abandon your historic domicile, and you must land and establish in the new domicile. Failure to do one or the other will defeat the domicile change and it defaults back to where it historically was. Let’s use New York for an example. If you retire in New York and jumped on your Winnebago and go across the country. You go to the national parks out West. You go to Florida. You’re on the road every month. You don’t change your domicile under the operation of New York law.
Even if you sold your house in New York, you fully left New York, you have no job in New York, you have no stuff in New York, you are not in New York, but you have not set down roots. You have not landed someplace else. By definition, you’re on wheels rolling around the country. In that set of facts, your domicile doesn’t change. That’s an extreme set of facts, but you’ve got to think about that for taxpayers who might be inclined to go somewhere for six months because they deserve it. They can do whatever they want. It’s important for everyone though that if they’re trying to change their residency, to stick a landing and then travel. Stick a landing and then move on from there. Until you abandon, which many of these people do, they have nothing left. Until you go land in a new place, New York will still get to tax you as a resident because your domicile hasn’t changed until you both leave and land. That can surprise people too.
That’s a somewhat critical issue. There are dozens of these things we could talk about and specific permutations and fact patterns that pop up. There are exceptions to residency based upon time spent in foreign countries and based upon a lack of presence in New York. A lot of people have issues that pop up with fiduciary income tax considerations in different states. For example, I have a trust that kicks off the stream of income. I’m going to move to Florida. Will the income that I receive as a beneficiary of the trust be still subject to tax in New York? Maybe. There are situations where these things run together in tandem where there’s fiduciary income tax considerations with regards to resident trusts, non-resident trusts, potentially exempt resident trusts that people need to think about. It’s not even necessarily the taxpayer’s residency, but the residency of something like a trust or the residency of something like a family member that could impact the taxpayer’s case and the potential value of it.
It’s becoming clear to the readers that this is not a casual decision. You need to sit down and plan this out. Your personal facts pattern or the fact pattern of your family can vary significantly from one group or one person to the next and significantly change the strategy or the things that need to be done to establish that residency and domicile. This is helpful, Dan. Thank you so much for your insights.
It’s my pleasure. We see so much of this stuff going on. Honestly, we didn’t talk about much yet, but the COVID situation has adjusted how people have thought about moving. Maybe it accelerated it. They can work from home now instead of being tied to an office in a certain state. It’s not just New York, but it’s all over the place. People are now resetting real estate markets in the country and the cities are going. A lot is happening. People are moving in droves. COVID presents opportunities to move, but it also presents some unique fact patterns that need to be perhaps considered with all of these kinds of tests and standards we’re talking about. Also, this idea that if you move back to where you came from in 1 or 2 years, that might be fun.
As a taxpayer, you can’t predict the future. You don’t know what’s going to happen. You might hate wherever you went. You might love it, you might not. The school would not be what you want. You can move in and move again. There’s one thing to put out there that if you’re moving now as a result of COVID or as a result of something that attributed to a move that maybe was accelerated compared to your plans. It’s something where you need to be careful that your intent is demonstrated to remain indefinitely and not to have it only be for a limited period of time. If an impression that an auditor would receive is that you moved for 1 or 2 years, the move didn’t happen in the first place. You didn’t land. That’s one thing to think about.
Some people are retiring and thinking about this in a big picture. Other people were displaced for a couple of months and then decided to move. Both of those groups of people can move and have moved in the last several months and will continue to move in the future. Some of them are moving into New York and other places. The tax rates are not necessarily the driving factor in those cases. Something to think about that if you do intend to move, make sure that your expressions and your actions demonstrate that it’s for an indefinite and permanent period so that it’s not questioned if you do move again.
With many other subjects, COVID has added its own layer of complication to this beyond the health considerations. This is helpful, Dan. I so much appreciate you spending time with me on the show. I hope we can have you back sometime in the future to talk about maybe this subject at greater length or another area of expertise for you. Thanks so much.
I appreciate the opportunity. I’d be more than happy to join you again. Hopefully, you and the readers found this interesting. I’m looking forward to the opportunity.
Thank you for joining Dan Kelly and me for our discussion about the issues surrounding establishing state and local tax residency. Have a great day.
Dan Kelly is a senior associate in Hodgson Russ’s Tax Practice. Licensed in both New York and Florida, Dan focuses on state and local tax matters, and regularly advises individuals and businesses on different aspects of New York State and New York City personal income tax, sales and use tax, corporate franchise tax, and several other lesser-known taxes. While focused on tax matters, Dan often counsels clients on a wide variety of legal matters, teaming up with his colleagues in different disciplines to deliver creative, pragmatic, and efficient solutions.
Dan’s clients frequently rely on his guidance for: tax planning for significant liquidity events; changing or establishing state and local tax residency; income, franchise and sales tax substantial nexus issues; complex business income and earnings allocation issues; and related matters. He has extensive experience representing taxpayers in audits conducted by several tax jurisdictions, and also represents taxpayers at various levels of tax controversy dispute resolution and appeal.
Original Release Date: September 9, 2020.
This podcast was originally distributed on September 9, 2020, by Independence Advisors. Independence Advisors officially merged with Modera Wealth Management on December 31, 2020. Please note that the information provided in these recorded conversations may no longer be current or may refer to events that have since passed.
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