The New York State and New York City tax laws have numerous traps for unwary nonresidents. To avoid one of the biggest tax hazards, nonresidents owning or renting homes within New York must be aware of the applicable residency tests and what records they should maintain to avoid a dual residency determination. Nonresidents of New York State are only taxed on income earned in or sourced to the state. New York City only taxes city residents. However, if a nonresident is not attentive to the residency tests, the tax consequences can have New York State, and possibly New York City, seeking to impose tax on all income, including interest, dividends, and capital gains, regardless of its source.
Both New York State and New York City use the domicile and statutory residency approaches to determine residency. Domicile is the jurisdiction in which a taxpayer has established his permanent home. A taxpayer can have only one domicile. The determining factor proving domicile is the taxpayer’s intention to establish this particular jurisdiction as his home. Intent is often supported by a host of factors, including business connections, time spent, voter records, location of children’s school, vehicle registration, driver’s license, and the location of items that are near and dear to the taxpayer.
To determine if a taxpayer is a statutory resident, a two-part test is applied by: (1) maintaining a permanent place of abode in New York for substantially all of the year (interpreted to mean a period exceeding 11 months), and (2) physical presence in New York for more than 183 days per year. Any time spent in New York for any portion of a day will count as a day spent in New York. For example, under this test, a Connecticut resident who owns an apartment in New York City, and commutes for work into the city five days per week during the tax year, is considered a New York State and New York City resident. Accordingly, the individual is liable for income taxes on all income from all sources to Connecticut, his state of domicile, as well as New York State and New York City, based on statutory residency. This is true even if the individual did not spend one night in his New York City apartment. As long as the abode is available to the taxpayer, statutory residency may be established. It should be noted that states permit their resident taxpayers a credit for income taxes imposed by other states on income earned in those states. However, the credit provisions in many states do not apply to investment income or income from intangibles. Other states, such as Connecticut, will permit a credit for all income items but only to the extent that the other state provides a reciprocal credit for taxes paid on all income. Therefore, the taxpayer in the above example will receive a credit in Connecticut for taxes paid to New York on the wages earned in New York. The taxpayer, however, will not receive a Connecticut credit for taxes paid, other income items, such as interest and dividends, because New York’s credit law does not apply to income from investments or intangibles. Of further note, income taxes paid to New York City are also not available to be claimed with regard to the credit on taxes paid to other states, thereby broadening the tax impact of statutory residency.
In recent years, the New York State Department of Taxation and Finance has increased its efforts with respect to seeking out statutory residents. The Department has implemented an aggressive campaign to identify such taxpayers by cross-referencing property tax and other public records. Additionally, New York has updated its nonresident income tax returns requiring filers to indicate if they own a New York residence and, if yes, the number of days spent in the jurisdiction. The implications of the Department’s actions have caused severe tax consequences. The occurrence of residency audits particularly with regard to individuals who live outside of New York but own or rent apartments and work in the city has dramatically increased. This emphasis has boosted tax revenues at a time when more and more individuals are fleeing New York for tax-friendly states, like Florida and Texas.
Should a statutory residency audit arise, preparation and document retention is the key to a successful outcome, since the burden of proving one’s physical location is on the taxpayer. Auditors consider contemporaneous calendars, credit card invoices, E-Z Pass statements, airline reservations, phone records, and any other documentation supporting the location of the individual. With a three-year look-back period for New York nonresident tax filers, and an unlimited look back for non-filers, maintaining such records is vital to a taxpayer’s ability to resist the state’s and city’s statutory residency assertion.
If you have any questions regarding residency for tax purposes, please contact Alan Goldenberg, Manager of Tax Controversy and State and Local Taxation, at firstname.lastname@example.org or 212-897-6421, or your Friedman LLP tax professional.