Among the many negative effects COVID-19 has had on our lives is the impact on people’s travel and work. As working from home became the norm, some people decided to relocate to the suburbs or to a second home in another state. This was especially true in New York which was at the epicenter of the pandemic for a significant period of time. More than a year has passed since then and there are those who want to change their residency for personal and financial reasons, including lower their income tax exposure. Unfortunately, if not handled correctly, they may be audited and face a significant tax liability.
New York State Residency Rules
Residency is an important factor to consider under New York State’s tax code because residents are taxed on all their worldwide income, regardless of where it is sourced. Nonresidents pay tax only on income earned in New York.
There are 2 tests for residency:
- Domicile Test—This test looks at where the taxpayer’s true, fixed, permanent home is. The state analyzes various factors including: Home, Active Business Involvement, Time, Items Near and Dear, and Family Connections.
- Statutory Residency Test—An individual who is not domiciled in New York can still be a resident under the Statutory Residency Test. To qualify, a taxpayer must spend more than 183 days in New York and have a Permanent Place of Abode in New York for substantially all of the year.
The COVID-19 crisis caused some taxpayers to change their activities in such a way as to affect their residency for tax purposes. Starting this year, state auditors are likely to examine issues such as:
- How much time did the taxpayer spend in New York last year? Both the domicile and statutory residency tests look at how many days were spent in the state. Note that even a partial day, counts as a full day.
- Was the taxpayer active in a New York business? A non-resident part-owner in a business may have taken a more active role in a company located in New York because of COVID, which could jeopardize their residency.
- Was the out of state move “temporary?” Auditors will be on the lookout for taxpayers claiming they changed domicile last year, but later took actions that indicated it was really a temporary move to get through the COVID-19 crisis.
- Did the taxpayer telecommute to New York from out of state? Taxpayers who live and work in different states may be subject to taxation in more than one state. However, various rules affect when someone is considered to have worked “in-state,” such as whether it was a convenience or necessity. Also, telecommuters should note that if they are a nonresident and their primary business office is in New York, telecommuting days are still considered “days worked in the state” unless their employer has established a “bona fide employer office at the taxpayer’s telecommuting location.”
Taxpayers with multiple homes should consult a tax attorney and/or accountant as soon as possible to specifically evaluate the risks of a residency audit. While it may be too late in some instances to fix a problem, in most cases, there are steps which can minimize the damage or, at least, prepare for it financially. If an audit does result, a tax professional is essential to help ensure the client puts the strongest case forward to avoid or minimize liability.
Karen Tenenbaum, Esq., LL.M. (Tax), CPA is the Founder and Managing Partner of Tenenbaum Law, P.C., a tax law firm in Melville, N.Y., which focuses on the resolution of IRS and New York State tax controversies. Karen can be reached via e-mail at [email protected] or by phone at (631) 465-5000.