With more people looking to move to tax-free states like Florida, I thought now would be the perfect time to look at one big consideration to have when moving states, or when purchasing an additional home in another state: Residency.
In episode 45 of the Retire Right podcast, I was joined by Karen J. Tenenbaum, a CPA and tax attorney with more than 35 years of experience in resolutions of IRS and New York State tax controversies. Using New York as an example, Karen laid out everything you need to know when moving states, how the residency rules work, what to expect if you get audited, and what your options are to resolve your tax matter.
According to Karen, the state of New York does approximately 3,000 residency audits a year and collects around 225 million dollars per year through its auditing. So, if you’re a high earner moving out of New York, there’s a good chance you’ll get audited. This is especially true if you’ve changed your domicile (the place you indicate as your permanent residence) but still indicate that you maintain some kind of living quarters in New York.
States like New York are aggressive with their auditing processes because they want to tax you on all your income, no matter where it’s derived. Therefore, if you’re traveling between homes in different states, the burden of proof is on you to show that New York is no longer your main residence, and it’s not always as easy to prove as it may seem.
How Residency is Determined
New York State will tax you as a resident on all your income (no matter where it’s earned) if you’re domiciled there or if you’re a statutory resident. But something like statutory residency, where you have a permanent place in New York and spend more than 183 days there, is more complicated than you would think. It’s not just about the day count, it’s also about the patterns of where you are when you’re not in New York (we’ll talk about this a little later on in this post).
Changing Your Domicile
If you were always in New York and are moving out, you as the taxpayer have the burden of proof to show that you no longer live in New York.
To clear the burden of proof, the state looks at five main factors:
Why are you moving? The state will consider this and compare your new home to your previous one.
Your Business Involvement
Are you actively involved in your business on a day-to-day level? If you are, it proves that you really haven’t left New York — even if you no longer have any ownership of the business.
This is not just the 183-day rule. Instead, the state is really looking for a change of pattern in where you are. For example, if you spend six months in New York and then spend six months on cruises, New York is going to ignore the time you’re traveling and claim you’re in New York the most, therefore making you a resident. Or, if you go to your second home in Florida but spend a month with each of your children in California and Maryland, New York is going to say you spent the most time in New York.
Items Need and Dear
What are you claiming are your hobbies? Have you moved all those items to your new location? Where have you put your photo albums? These are all things the state will look at to determine where you live.
Where do your children go to school? Most of the time, where your children go to school is where you’re primarily domiciled. Again, things can get tricky. If you moved to Florida but have an apartment in New York for your child, you could still be considered a New York resident. You’ll have to be the one to come forward with definitive evidence to prove you don’t live there.
The 183-Day Requirement
If you spend a minimum of 183 days in New York, you are considered a resident. However, one day in the state’s view is one second spent in New York. So if you live in New Jersey and drive the babysitter home across the border in New York, guess what — that’s a day in New York. There are no partial days when it comes to them counting how long you’re spending in the state.
Defending Yourself During an Audit
So, with everything the state looks at, from how many days you’re in New York to how actively involved you are in your business, how do you go about defending yourself in the case that you are audited?
Karen recommends that you keep as much documentation as possible. The state will request everything from credit card bills to phone records to calendars, but you still have the burden of providing clear and convincing evidence that you were not in the state 183 days.
That means you have to prove where you were every single day. What happens if you’re gardening in the backyard in Florida and there’s nothing on your calendar? They look at that as a New York day. However, sometimes being in a faraway state can benefit you since plane records will show where you are. Being closer to the border can be more challenging to prove, since you could easily drive into the state and spend cash.
It’s important to note that if you get an audit request, you can appeal. There are different levels of appeals, and Karen says the best thing to do would be to settle at the audit level. The state often adds penalties to the amounts of liability, so the earlier you can settle, the better.
Much of the process ultimately comes down to making a strong case for yourself — which is why you need a good representative. Representatives like Karen have years of experience under their belts with these kinds of cases and they know what the state is going to look for and argue against to make sure they receive your taxes.--
For more information on the basic rules of moving and taxes, you can check out Karen’s e-book over on her website: https://www.litaxattorney.com/. Also, if you have any further questions about residency, feel free to reach out to either Karen or myself.