New York State conducts residency audits to establish whether a taxpayer is a New York State resident, a nonresident, or a part-year resident in order to determine the correct amount of that taxpayer’s tax obligation.
If you live in more than one place and one of them is in New York, you should prepare for a New York State residency audit. The burden of proof generally is on you to support your claim that you are not a NYS resident. The same rules apply if you have a place in New York City and elsewhere in New York State, and you claim that you are not a New York City resident.
Understanding Your Residency
There are two ways to be a New York State resident: either you are domiciled in New York, or you are deemed to be a statutory resident of New York.
Domicile means a permanent home, or the principal establishment to which a taxpayer intends to return whenever absent.
A statutory resident is not domiciled in New York State but maintains a permanent place of abode there for substantially all of the taxable year, and spends in the aggregate more than 183 days of the taxable year in the state. For example, you might live in New Jersey, but commute to Manhattan on workdays and also own a house in the Hamptons to use on summer weekends. In that case, an auditor could argue you should be taxed as a New York resident.
Statutory residency is a separate consideration from domicile, which we’ll further discuss in a future post.
Scenario: Establishing New Domicile
Let’s say you are a native New Yorker who’s fortunate enough to own two homes, one in New York and the other in Florida; you spend the time between November and March enjoying the good weather in Florida, and the rest of the year in New York. The state considers you a New Yorker, and you’re subject to paying taxes on your worldwide income.
But if you were a nonresident of New York, you’d be subject to tax only on that portion of your income attributable to (“sourced to”) New York. Let’s say you spend more time in Florida than in New York and want your taxes to show that you are a Florida resident. Be careful: spending time in Florida is not enough. To establish a new status as a Floridian you must change your domicile, which involves simultaneously lessening your ties to New York and strengthening your ties to Florida. An auditor from the New York State Department of Taxation and Finance initially will consider five primary factors in determining your domicile. You can take steps that might sway the determination in your favor.
1. Home. Which residence is bigger or more expensive? Which is rented or owned? How much have you invested into their upkeep and maintenance? The numbers and dollars don’t lie. Usually, you’re going to put the money and effort into your primary home.
2. Active Business Involvement. If you’re still working, where are your active business interests? An auditor may not be persuaded that you are a Florida resident, if you remain deeply involved in your New York-based businesses.
3. Time. This is where most people get confused. The 183 days refers only to statutory residents. As a general guideline, you should be able to prove that you spend significantly more days out of New York and in your Florida home. If you spend five months in New York, three in Florida and four months traveling, the auditor will see your time in New York as the most prevalent. Documents like bills, phone records, receipts, and passports should support your claims.
4. Near & Dear. Where do you keep valuable items, like family heirlooms, jewelry, cars and art collections? An auditor will assume you’ll want to be in close proximity to the items that have monetary or sentimental value.
5. Family. Where does your family reside? Where do your minor children attend school? It may be difficult to show that a spouse, minor children or dependents have a separate domicile from yours.
Useful, But Not Determinative
You might think that obtaining a Florida driver’s license and voter registration will show a New York State auditor that you are no longer a New Yorker. While these can be helpful, they do not have the weight of the primary factors above and are not determinative. Other factors in this category include where your car or boat is registered, physical location of safe deposit boxes, and citation of domicile in legal documents such as a will or trust.
A Note On What Does Not Affect Your Residency
There are other misconceptions about residency audits that should be addressed.
● Your accountant’s location does not impact your status. He or she can have an office in New York even if your domicile is in another state.
● Your burial plot is also not a factor during a residency audit. Your eternal resting place will not be considered maintaining ties to New York.
● A passive interest in a New York partnership is not considered in evaluating domicile.
You’ll know that the State is looking at your situation if you receive a nonresident audit questionnaire in the mail. Unless you fully understand the rules, you should always consult a legal or tax professional before completing it.
There are other issues and circumstances that can influence an auditor when determining your residency and we can help you plan accordingly and mitigate tax risk. Contact Capell Barnett Matalon & Schoenfeld at (516) 931-8100 or visit here to schedule a consultation.