At the very least, COVID-19 has provided an excuse for not making that unwanted trip to visit relatives for the holidays. For those of you who might still get some negative feedback, our holiday gift to you is two-fold: firstly another excuse (at least a new one) not to attend that family function, and secondly, potential tax savings for using our excuse.
The excuse: I can’t spend another day in (fill in the appropriate tax jurisdiction) because I will be taxed as a resident and owe an additional (please fill in the appropriate dollar amount) in personal income tax. Even worse, the House and Senate are currently weighing changes to state and local tax law, so I’m not even sure where I stand!
Our clients and readers facing dual residency issues know – all kidding and excuses aside, this is a real issue they need to monitor carefully, especially as the year is coming to an end. Most states and localities imposing an income tax have a two-prong test (meeting either one can make you a tax resident) to determine whether you will be paying tax on all of your income in the jurisdiction. The first is the domicile test, the place where you intend to be. This topic has been the discussion of numerous past blogs and likely the topic of many future ones.
The second trap, commonly known as the statutory resident test, applies to those who typically have some type of living quarters within a jurisdiction and spend a requisite number of days in the State. The magic number is generally 183. If you have living quarters or a place of abode in the jurisdiction and spend one day over 183 days, you have gone over the cliff and become a tax resident.
The typical scenario is that of a former New York couple who has sold its historic New York residence and taken other actions to abandon the former New York domicile. They purchase a beautiful new home in a no-tax jurisdiction such as Florida. They still like to spend their summer at the beach so they purchase a small apartment in Long Beach, New York. You have explained to the couple they must count their days carefully. A calendar must be prepared and third-party documentation (credit card receipts, ATM charges, etc.) should be used to document as much time as possible spent outside of New York, but certainly less than 184 days.
Thanksgiving comes and goes and right before Christmas, you receive a phone call from the couple: “Is it okay if we spend just two extra days at our kids’ ski house in upstate New York?” After taking a deep breath, you explain to your client that once they have spent 184 days in New York, all of their income, exempt from state taxes (remember, Florida has no personal income tax) is now subject to tax in New York. It doesn’t matter that you didn’t stay in your house and it doesn’t matter that “no one will find out.”
Aside from genuine concern for their health, there is another way to make your snubbed relatives feel better about all of this. Let them know with all the money you have saved on state tax, post-pandemic you are planning to take the entire family on vacation -- outside of New York, of course.
Concerned about getting caught in the dual residency trap or seeking to learn if you are at risk, contact me at WBerkowitz@BerdonLLP.com or your Berdon advisor.
Wayne Berkowitz, a tax partner and co-leader of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.