The Loss Of NY State Tax Deductions Is Making A Move To The Sunshine State More Attractive
All tax legislation has winners and losers. Even if one buys into the canard that extraordinary economic growth makes everyone a “winner,” some always will fare better than others. In my neck of the woods, the tri-state area (NY, NJ, CT), the loss of the deduction for state and local taxes has left very few feeling that they are benefiting from the enactment of the recent Tax Cuts and Jobs Act (TCJA). More than ever before, clients now want to know how they can change their tax residence to a state like Florida that doesn’t have an income tax.
The easy (and often glib) answer is to move to Florida while relinquishing every possible connection to New York. While this is an easy plan to implement for a young person or couple starting out in life, it can be a bit more complicated for those who have already built substantial roots in the Empire State. More often than not, clients want the best of both worlds – keeping their New York home while avoiding New York tax – a difficult, but not impossible goal.
New York and many other states have complex rules for determining who is subject to their tax nexus and considered a tax resident. The rules generally center on the concepts of “domicile” and “statutory residency.” Assuming an individual is present in New York for more than 30 days, they will need to change their domicile to be subject to the far more liberal 183 day test.
Domicile is a difficult concept that deals with a person’s feelings and intentions (think “home is where the hearts is”), rather than a bright line test. Contrary to popular belief, domicile is not the place that one registers to vote, maintains a driver’s license or registers a car. Rather it is a confluence of factors and intentions, and, once established, domicile continues until the person relocates and establishes a new domicile – the “leave and land” concept.
Since domicile is a substantive inquiry dealing with feelings and intentions, NY auditors typically rely on five intertwined factors when analyzing a person’s domicile: home, active business involvement, time, near and dear and family.
The home factor considers the nature and use patterns of the New York and Florida homes including the size and value of each, whether residences are owned or rented, where holidays are spent, and the nature of the “roots” that have been planted in Florida and uprooted from New York.
Active business involvement is where a person earns compensation or participates in the decision-making of a business – often a non-factor for retirees.
Time is an extremely important consideration as a person will spend a majority of their time at “home.” A change of domicile should coincide with a change in patterns between time spent in New York and Florida.
The near and dear factors are personal, often focusing on the location of primary religious and social affiliations. For example, a recent case hinged on where pets resided.
Finally, the physical location of family is considered, specifically that of the spouse and minor children.
A person who successfully changes their domicile still may be considered a NY statutory resident if he or she maintains a permanent place of abode in New York and is present in New York for more than 183 days in a given calendar year – with minor exceptions any part of a day counts. A statutory resident is taxed by New York on 100% of worldwide income regardless of where it is earned or where remuneration is paid. (See: “To Avoid NY Statutory Residency Traps: Go By The Rules, Not “Common Sense”)
Following the enactment of TCJA, the benefits of changing one’s domicile has increased greatly. However, New Yorkers looking to swap the Empire State for the Sunshine State should take note that the scrutiny of New York’s tax authorities is also likely to increase as well.