On-Demand | Navigating a Change of Domicile
This timely presentation highlighted the various factors to consider when changing your domicile.
Jon Zefi:Good afternoon, everyone. I'd like to welcome you all here to our webinar today. I'm joined today by my colleagues, Charles Brezak, Andrew Cohen, Stephanie Hines, and Mitchell Novitsky. We're going to be discussing navigating change in domicile. We all have to first and foremost acknowledge that the COVID-19 pandemic has fundamentally changed the way businesses operate and how we go to market on a regular basis.
Jon Zefi:As is reflected in this webinar, only one of our presenters is in our Manhattan office today. The rest are working from home and conducting this webinar remotely. So it goes without saying that with the economic downturn that arose with the global pandemic, States began to suffer tremendously. Their tax coffers were substantially reduced. Sales and transactions taxes were reduced. Income tax payments to the states were reduced, and states were running tremendous deficits.
In response to those, we seen a tidal wave of tax legislation, increasing rates effectively upon the wealthy. And so what we have from our client base was a response just generally to this, asking us across various industries from technology entrepreneurs, FinTech entrepreneurs, the alternative investment space, hedge funds, private equity funds, cryptocurrency traders, other professionals to rethink exactly how they conducted themselves from a tax perspective, from an operational entity perspective, as well as from an individual domiciles perspective. And this webinar comes out of those conversations and sort of the discussion points that we've had with our clients across those various sectors.
So today, we're going to discuss sort of how do you define domicile? How do you change that domicile? Some statutory residency issues, and then from a larger perspective, a number of our clients across the verticals that I just mentioned have also queried us about opportunities to change domiciles in Puerto Rico and the federal as well as state benefits associated with that.
So we have a tremendous amount of ground to cover and a lot of things to kind of discuss today. But I think it's important that we level set for a moment. And let's just talk about where people have moved and how they've moved. And I think the most informative sort of analysis is every year United Van Lines comes out with their national mover survey, and they found that the top 10 states for inbound moves in the US were effectively Idaho in 2020. That is where Idaho, South Carolina, Oregon, South Dakota, Arizona, North Carolina, Tennessee, Alabama, Florida, and Arkansas.
The jurisdictions with the highest migration out of those particular states, whereas comes to no surprise, probably anyone who's on this webinar today, California, Connecticut, Illinois, New Jersey, and New York. And part of that is driven by tax policy in those respective jurisdictions. And we'll address some of those factors.
Now, not everyone is looking at tax arbitrage, but although it plays an important part of the discussion, some individuals are looking to retire in more favorable jurisdictions. And so when we look at sort of the top states for retirement motivated moves, we saw that in 2020 Delaware, Florida, South Carolina, Arizona, Wyoming, Idaho, New Mexico, Nevada, Maine, and North Carolina, were at the top of the list. And obviously, the important point that needs to be mentioned is that nine out of 10 of those states either exempt a large portion of social security from income tax exempted completely or have no income tax at all.
So I think it's important for us to kind of look at a heat map of activity that's being conducted in the states. And I think this heat map is informative of sort of what drove part of the analysis in people's desire to move.
So let's look at the jurisdictions without an individual tax rate for a moment. We've seen a steady migration into states like Florida, Texas, and Nevada, as well as Washington State, Wyoming, and South Dakota, and Tennessee because of their favorable tax environments. And there's no surprise that people from California are exploring moves over to Nevada as well as folks from Oregon and people in the central region, looking at Texas as a potential hot area to move as well as Tennessee. And from a Northeast perspective, you can just tell by this heat map that there's been a tremendous amount of activity and recent legislation increasing tax rates in New York and New Jersey. That's driven a lot of our clients that are tech entrepreneurs, cryptocurrency traders, private equity people, hedge fund people, biotech entrepreneurs as well to reconsider how they do business and reconsider where they want to locate themselves. Then we've seen the constant migration of people exploring Florida, Puerto Rico, Texas, and these other no-tax jurisdictions as potential opportunities to relocate.
I think what would be illustrated if we look at some of the states where we've seen an increase in taxes. I think a quick survey of those states would be informative to the dialogue and would help explain some of the motivation. Obviously, you have to feel it for the states that we're dealing with and continue to deal with the COVID pandemic. There is tremendous drop in the tax coffers of those respective jurisdictions.
So what a lot of states have done is they've increased effective tax rates or implemented various types of surcharges. So look at Arizona, for example, they adopted Proposition 208, which created an individual tax surcharge of three and a half percent for marginal income for a single taxpayer over $250,000 or for a married couple filing jointly over $500,000. Arkansas created three separate income tax schedules, depending on the taxpayer's total taxable income.
So as the taxpayer's income tax rises, the taxpayer is not only facing higher marginal tax rates but now must deal with entirely different tax schedules, further complicating the matters.
Arkansas is top marginal rate. However, on a positive note was reduced from 6.6 to 5.9%. Similarly, in Colorado, Proposition 116 passed in November of 2020, that resulted in a permanent reduction of Colorado's flat Individual and Corporate Income Tax rates from 4.63% to 4.55% retroactive 2020.
But one of the greatest shockers that came out of the pandemic was that in September of 2020, New Jersey enacted its millionaire's tax, and this law raised income taxes by reducing the kick in for the state's top marginal rate, which was $5 million at one point, and was scaled down to $1 million of taxable income. That affected a tremendous amount of high earners in New Jersey who were all shocked at the suddenness, the change. Similarly, in New Mexico, the top marginal individual rate was permanently increased from 4.9% to 5.9% for the 2021 year.
The bright note is Tennessee, which joined seven other states that don't levy in individual income tax. So, as we mentioned earlier, those states are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire doesn't levy a tax on earned income, but just to point out, it does tax interest in dividends at 5%.
Probably the greatest shocker that led to the significant amount of conversations coming out of our client base was New York's recent enactment with the signage by Governor Cuomo of the 2021 and '22 Budget Bill on April 19th, 2021. That created effectively through three new tax brackets for high-income earners. So if you're one of the privileged few of income over 2.1 million, but not over 5 million, you're a state rate went up to 9.65%. If you were bracketed between 5 million but not over 25 million, you went up to 10.3%. And for those privileged few who are over $25 million, their effective state tax rate was 10.9%.
When we look at New York, however, a lot of those individuals who are earning those significant sums tend to be in the alternative investment space, private equity, hedge, tech entrepreneurs, and we overlay New York city's rates.
Well, at the highest end of the spectrum, with income earners over twenty-five million dollars combined New York state and city rate is 14.76%. That is effectively the highest rate, just to go back to this heat map of any jurisdiction in the United States when we look at the combined New York State and city rate.
That has motivated a large proportion of the discussion that's going on here. Given the private equity environment where private equity is very actively engaged in seeking new transactions, we have a number of our entrepreneurial client base coming to us and saying, "Listen, we need to do some pre-transactional planning. We want to maybe move the commercial domicile of our business, seek out other offices, figure out how we can migrate our business operations to more tax-favorable jurisdictions like Texas, Florida, Puerto Rico, and other jurisdictions as well, and change their personal domicile because they're anticipating a potential extraordinary liquidity event."
We've seen the discussion revolve around that move of business operations to primarily States like Nevada, Texas, Florida, and Puerto Rico, and to a lesser extent, Tennessee, Wyoming, South Dakota, and Washington State.
So having said all of these, what we really need to do is focus the discussion now on how we define domiciles. And with that, I'll turn it over to my colleague, Stephanie Hines, to begin the discussion there. Steph.
Stephanie Hines:Sorry, guys. You think after 14 months, that would have been natural. But so, what I was saying is before we discuss changing domiciles, we do first have to understand what domicile is. Domicile, which is also interchangeable with primary residence, is a place that you consider and intend to have as your permanent home. This is the place that you returned to after an extended stay and the place where you have your items that are near and dear to you. So essentially, it's where you hang your heart.
Something to remember is that your domicile is very different from a residence. You can have many residences, but you can only have one tax domicile. So getting into what states look at, they don't only look at the intent on how the home is used. Whether it's a temporary residence or primary place of abode, but they also look at other factors to determine this domicile.
Item such as size and value of property and how it compares to other residences that you may have because typically the larger, more valuable home is the primary residence.
They also look at how the property is used in comparison to the other residences, whether it's number of days, even getting down as granular as where the family events are held, where holidays are spent. So I just commented on the number of days. And it's important to mention here that the number of days spent in each state is a primary consideration in determining domicile versus residency because most people spend most of their time at their primary home when compared to any other residents.
Again it's not a determining factor. It's primary as days spent are also used in determining statutory residents, which is something that Andrew is going to speak to in more detail a little bit later in the hour.
So now, how does an individual actually established a change in domiciles? So you would think that it would be simply packing up and moving you've changed, but it's not as easy as that. And definitely not as easy in the eyes of a State Taxing Institute. It's important to remember that your domiciles will remain the same until you affirmatively abandon it and acquire a new one with the intention. And that's the key term, the intention of making the new one your permanent home.
Mitch and Andrew will walk through the details in a little bit, but the burden of proof on the change is on the individual taxpayer, and all of the evidence that would have to be put forth in order to substantiate that change needs to be clear and convincing to the state. It's something where, and Jon had mentioned this a little bit ago, where if you are planning on changing domiciles, think about this in advance.
We work very, very closely with our clients during the planning stages in order to make sure that they do everything possible, whether it's purchasing something at a local coffee shop or gas or something along those lines, just to make sure that there is absolute substantiation because the states will issue a residency on it. And especially in the current COVID environment, where to John's point, people are leaving and going to lower tax jurisdictions.
So again, with the burden of proof being on the taxpayer, documentation is key. As I said, auditors will review all of the actions taken by a taxpayer. Let's use moving from New York to Florida, and before getting into some of the additional steps that should be taken, which Mitchell speak to in just a moment, an important step is to make sure that your household items, your furniture, your collectibles, such as artwork any other items that are near and dear to you, such as pictures of family and friends that were present on display in New York, they should now be present and on display in Florida.
Now they don't have to be obviously in the same arrangement, but they should all be there. So what we, and it sounds a little extreme, but we suggest to our clients to take pictures of their New York residents as is before they move to their Florida residents. And then when they get to their Florida residents, take photographs again with those same objects after the move and what this does is it documents that all the items that I just mentioned, the artwork furniture, photographs are there following that domicile change. And I know I'm speaking for everyone on this panel, but New York has come in during residency audits with somewhat we would consider extreme requests. I mean, I've read where New York State came in once. And because the taxpayers is far was kept in a New York apartment that she had moved out of, him was only using sporadically. They claimed that because her for was near and dear to her that she hadn't actually changed her domicile.
So it's something documentation and planning are key in establishing a change. And so I'm going to turn this over to Mitch now to get into the granular details of certain things to do and not to do in Florida. But one thing that we definitely can't stress enough is to preplan and document. Mitch over to you.
Mitchell Novitsky:Thank you, Stephanie and Jon. I want to indicate that we are focusing or our discussion deals with Florida and New York, but I do want to stress that the domicile concept pretty much exists in every single state and the same rules that we're talking about with regard to New York, Florida would apply whether you're moving from California and Nevada and New York, Texas, New York to another lower taxing jurisdiction.
So primarily, a lot of the moves we're seeing is Florida, but it would apply everywhere. I also want to stress that, New York State and New York City, you can be a resident of the state and not a resident in the city. The city domicile rules are the same as the state domicile rules, as well as they have the second statutory residency tests, which Andrew is going to get to later. But the same rules that apply to New York State also applied to the city.
I think the key thing to stress following up with Stephanie's point when you change your domicile in order to prove it, it's very important that you sever your connections with your old domicile, your old place of residence and everything, and establish as many connections as possible with the new.
The problem I see is people keep certain connections with their old residents. And then in order to comes in and in order says, "You know what? You didn't change your domicile." We see this often because a lot of our clients may change their domicile, but they keep a residence, let's say a New York City. And you have to be very, very careful when you keep a residence in New York City. Andrew, we'll get to that later that you don't fall under the Statutory Residence Test. And that test is determined on an annual basis.
So you have to be very, very careful when you leave to move as much as you can from the old, separate from the old and established with the new. I began my career with the New York Finance Department and the Legal Affairs Division. And following up on another one is Steps' points. It's very, very important. The burden of proof is on a taxpayer. You have to document everything. You may think that this clearly is obvious. This is what I intended. This is logical. This is equitable, but the issue is, can you prove it to an auditor?
So you have to save as many records as possible. I mean, I had a client a few years ago. I got call on the weekend got into a nose argument. His wife and him are on the phone. She says, "I don't understand." They had a place in Connecticut. And then they had a place in New York City. She says, "My husband's going to Dunkin' Donuts. He's buying bagels. He's saving every receipt possible. And then he's calling me all the time. Even when he's in the backyard, why are we doing these things? This may be a little bit of an extreme, but you have to prove where you are.
Remember the majority of your time, if you're domiciled in a state, should be in that state. And then for the Statutory Residence Test, they count 183 days. Any part of the day is a day. We'll get to that. So save documentation. That is something that I can't stress enough because when you do get audited, these audits can be very intrusive, and documentation is the key.
Another thing is when you do change your domicile, try to do it as quickly as possible. We're going to go through a checklist now real quickly, but the longer you wait, if an order comes in, an order could say, "You know what? You didn't change your domicile. You said you changed it in March. You didn't change it until November because you didn't do this and that until then." So if you're going to change your domicile, you making a move, do it as quickly as possible.
So to go through our illustrations here. Things to do in Florida to Establish Domicile. But like I said, this could apply anywhere else, maintain your Florida residence as your permanent most important home. I get clients saying to me, or someone said to me, "I got a mother-in-law in Florida. She's got a one-bedroom. She has an aide there. Maybe I'll move in there with my kids, and I'll change my domicile."
No, you got to get a place that's separate. That's big enough. That's bigger than your New York home. If you're going to keep the New York home, it has to be a place that shows that you're living there. It can't just be by your brother-in-law or your mother-in-law or something else.
To the extent possible, move furniture, furniture, clothing, and personal effects from your New York residence to your Florida residence. We had before COVID clients already had, or people had secondary places somewhere, but they didn't do any changes post-COVID. If you really want to change your domicile, you got to show that by moving furniture and moving other things to show that your intent was, and your intent must be backed up by facts that you can prove on audit to change your residence to Florida.
Make efforts to furnish your Florida residents more substantial than your New York residents. You shouldn't have a New York residence that's gigantic and small residents in Florida. If you're going to change your domicile, it better be something substantial.
Change the address for all mail from New York to Florida address. These are things that are like no-brainers. You got to do them. And you got to do them as quickly as possible, but people delay. And then, an order comes in, says, "Show me your correspondence for these period of months," and people don't have it. Everything's still going to New York.
Use your Florida address on bills, checks, credit cards, magazine, subscriptions, and important documents such as passports, contracts, registered securities, deeds, and leases. Remember sever everything with the old and established change at all to the new location.
Notify banks, insurance companies, pension plans, managers, Social Security Administration, all institutions of your change of residence. You shouldn't be using your old residence on anything. If you want to prove you change your domicile, everything should be coming to the New York address.
Incidentally, I will say, following up on Jon's point, COVID became a situation where a lot of people decided to change their domicile a couple of things. COVID really came into effect like March. Some people say, "Well, I changed my domicile in March." You got to do a lot of things to change your domicile." So, be careful in terms of, and that's where your accountant and your tax consultant comes in. They can determine based on everything together when you change your domicile. Because when auditor's look, there are more important items. As Stephanie mentioned, where your family is, where your main home is, where you place of businesses, but there are less important items.
Sometimes the question is, when did the change of domicile take place this month or that month? You can get a lot more leverage if you do more quickly than if you put these things off. So use your Florida address. And a lot of times on audit, you'll settle. The order will say, "You change your domicile, but the question is what month?" So the more you do, and the faster you do it, the better off you are.
Use your Florida address for all purposes, income tax returns, et cetera. Stationery should reflect your Florida address.
Notify religious, social, political, civic, and professional organizations. If you're down in Florida, but all your organizations that you belong to are in New York, your place of worship is in New York, your business associations, they're in New York, ghost auditors will ask a lot of these questions. Remember, domicile is the intent to change, to replace, to be your permanent home, but you got to be able to establish it with documentation and facts.
Have your new residents indicated in directories of such organizations. If appropriate, change your affiliation with New York organizations to nonresident status. We, for example, we go through with each client a checklist, and religiously, we keep up with the client and make sure that they're doing everything they're saying they're doing.
For example, coming up, surrender your driver's license and license plates, obtain new ones in Florida. Obtain insurance for your automobiles, boats. Open checking, savings accounts in Florida.
File a Florida declaration of domicile. Not every state has this, but you can file a declaration of domicile with the clerk of the court in the county in Florida. Do this as soon as possible.
Then Florida has a homestead exemption, do these things as soon as possible, register to vote, and vote in Florida. I mean, I had a client for example, and it's very, very important that everybody vote, but they didn't register to vote in Florida. They changed the residency supposedly earlier in 2020, and then they wanted to vote in the presidential election at the end of the year. And they voted in New York. I mean, I'm proud of everyone that votes, but at the end of the day, this should have been done earlier, and they should have voted in Florida, and they should've voted in person. These are things that you shouldn't procrastinate. Do as soon as possible.
So if you catch it like that client I mentioned before from your spouse saying, "Why didn't you do this? Why are you doing this?" It's important to document. And it's important to do everything as soon as possible. Terminate safe deposit boxes is in New York. I mean, as I mentioned, they look at everything taken together. So I wouldn't go crazy. Do as best you can with all the recommendations.
Maintain medical records and physicians. You should generally change the doctors if you can move into Florida. Sometimes you have a situation. There's a specialist. There's a relationship. That'll be determined on a case-by-case basis, but you shouldn't have, for example, a dentist for your annual checkup. In New York, if you're saying that you change your residency to Florida.
Execute a Last Will and Testament declare in Florida as you domicile. Update your Wills. It's a good time. Consider purchasing a burial flat in Florida. Well, I would say, if you're more of an elderly couple at something to consider, if you're younger, I don't know that you have to do something like that. My father was a clergy. There were situations where people bought a burial plot together, and then they either divorced, or one spouse passed away. And then they had a tombstone shared by both spouses and then the surviving spouse. So the other spouse didn't want to be buried there. So I'm just trying to add a little humor to this, but consider all these things to establish a residency in Florida.
Change your insurance policy to reflect the fact that Florida is your primary home. Maintain a diary or calendar indicating where you are each day a week. That's good. You should do that, but auditor's know that you can write anything you want in your diary. So back it up with facts.
Obtain any necessary professional organizations registration in Florida. If you're down in Florida, you shouldn't be. Let's say you're an attorney. You shouldn't have just a New York attorney's license. You should have a Florida license, unless, of course, potentially you're retired.
Obtain subscriptions to local, Florida, newspapers and magazines. As I said, try to do as many of these things as possible. They'll consider all the facts together when making the analysis.
Open an office in Florida, establish an office in your home. Where your place of work is, is very important. So if you're going down to Florida, your employer is in New York, and there are other issues we'll get to later on a presentation, but what's the reason. And can you work in Florida? I know COVID opened up a lot of opportunities with telework, but these things are going to be questions that the auditors asked, and you have to be prepared with an answer.
Be present in Florida at a minimum, more than you are present in any other state. So if your domicile is Florida, you should be there. You can travel, go other places and everything, but if you're maintaining a place in New York, don't stay there that long. Things, like that-
Jon Zefi: Just one quick point. So maybe what you can talk about is, we've mentioned briefly that, maintain your calendar and a lot of people have their assistants maintain their flight schedules, et cetera, and make copious notes as to where they're traveling to and what their travel itinerary is as part and parcel of that. There's also some apps that are out there that can also help you maintain that calendar as well, that provide documentation because they are pinging you at your location, and reflecting your whereabouts and documenting that electronically that can help substantiate the circumstance as well. Do you agree?
Mitchell Novitsky:Very good point. And there's also apps now on the statutory residency, which Andrew we'll get to. So it gives you a reminder when you're getting close to the 183 days, not to go over that. But yes, do whatever you need to do. The key thing is, not to get sloppy on this, and religiously make sure that you continue to establish your connections in the new and sever your connections with the old. I want to say something too. I had a couple of clients say, "Well, I'll try it out for a year. If it doesn't work, I'll go back." No, when you change a domicile, this is a permanent move. I mean it would be rare. Maybe a job change is something that you would go back to New York because of what it spends three years. So don't think you're going to do this. And a year later say, "You know what, if it doesn't work, I'll change my mind." You really have to look at this as a permanent thing, going to go on forward basis.
Jon Zefi:That's an important point, Mitch for a lot of our clients, particularly those entrepreneurs who are looking to sell their businesses to private equity, they're entering into a change of domiciles prior to the sale. And they're oftentimes raised the question, "How long do I have to stay there? Where do I have to be?" And your point is, well taken audits, typically roll through a three-year window of time. So you're looking to establish the domicile and be there at a minimum for three years so that you could fulfill the optics on your move and changing domicile and reflect that you didn’t intend to make a permanent change from one jurisdiction to another.
Mitchell Novitsky: Absolutely. Although I will say, and I started mentioned before, we've had clients now, New York realizes that this is a big loser for them. A lot of people are leaving. So they have set up a whole unit in the desk audit division where they're trying to do audit, residency audits. So we've gotten notices to our clients and I'm sure other you on the phone may have gotten notices where just, if you changed in 2020, they'll say, "We noticed that you changed your residency this year, where did you go to and what do you have or why do you believe you change your residency?"
So it may not be a formal full-scale field audit, but they will be prepared to get questions. Once again, documentation, documentation, documentation, because if you change your residency, they may ask and you got to be prepared to say why you believe your residency changed.
Just a couple of other items before I turn it over to Andrew and he'll go over to the second test. We're doing the domicile, he'll go over the statutory residence. Things not to do in New York. As I said, establish with the new Florida, cut out your relationships and your connections with the old. Don't come to New York on any frequent basis if you maintain a residence there in particular, cancel all your utility services that are in New York, unless you need them. There's that IRS selling your residence. If it's a principal residence, you get to exclude a portion of the gain. It's got to be two years, make sure that that relates to a period where your residence was in New York prior to your change. You don't want to say that New York is not your primary residence when it comes to residency and then claim otherwise for federal.
Don't use a bank or brokerage statements in New York, unless absolutely necessary. And of course, don't file a resident return. You may be a part year resident. If you're a part of` your resident, work with your tax consultant to determine exactly when your residency change. And I'm going to get into a little later in the presentation. If you do change, you may still be subject to some New York taxes. It won't be the same, but anything that basically related to your residency period, or that is related to New York sources, that they can tax the non-resident.
So if you're intending to sell a partnership interest you might want to wait until you sever your residency, because in most cases, a non-resident won't be taxed on the sale of a partnership interest. There are limited exceptions. If it's a real estate partnership, more than 50% real estate or IRC Section 1060, but just remember the general rule, you can consult your tax accountant on the specifics.
Don't sign any document indicating you're domicile principal residences in New York. Don't vote in New York and New York resident should be calling your Florida residents. And some other facts supporting non-New York domicile, your habit of life, your whole lifestyle should be basically centered around Florida. You should be celebrating the holidays and other things in Florida, your charitable giving and everything, your connection shouldn't be in New York, establish connection to Florida. Or as I said, any other state that may be applicable. Get on boards, in Florida.
I had a question in finance the other day, could I still stay on my co-op board in New York? I personally wouldn't recommend it. That shows a connection to New York and that could be problematic. They'll consider everything together. And that could be the thing that creates the problem. So do as little as possible, you might even consider sending announcements to your friends and conduct yourself in a way that shows that you're in Florida. Don't post a picture on Facebook in front of the Statue of Liberty, and don't put on LinkedIn, a New York address or any New York context. Everything you do in every aspect should show that you're in Florida. At this point, I'm going to turn it over to my colleague, Andrew, to discuss the statutory residency rules.
Andrew Cohen:Thanks, Mitch. And you can follow these steps and change your domicile and still have to pay tax in New York and all your income if you're a statutory resident of New York. Statutory residency is defined in New York Tax Law 605-(1)(B) and it has two main elements.
Number one is that you must be in New York for more than 183 days of the taxable year. Number two is you must maintain a permanent place of abode. And the definition of permanent place of abodeis not in the statute, but in the actual regulations, Section 105.201(e)(1). And theregulation states the definition of permanent place of abode is a dwelling place of permanent nature, the taxpayerdoes not have to own or lease the dwelling place; and any dwelling place owned or leased by your wife or spouse is going to be included. And also a mere camp orcottage, which is suitable only for use for vacations it's not a permanent place of abode. This is a very broad definition. And this analysis was set up in the matter of Evans back in 1993, and there are two real inquiries that you have to ook into.
Number one is are youmaintaining a place of abode? And number two is what is your relationship to the actual dwelling? And that was not decided for many years, until the matter of Gaied was decided in 2014. In the Matter of Gaied they said that you must have a residential interest in a dwelling to be a permanent place of aboard. And to understand what that means, you have to look back at how the court of appeals decided that case and look towards intentions of the statute for statutory residency. The case they looked at was the Matter of Tamagni. And in that case, the case looked at several of these taxpayers who are millionaires moved into New York, bought a place, stayed there for about 10 months, and then they left New York, claiming their non-residents of New York.
So the purpose of the statutory was to really fight this tax evasion that they found in these cases. And the intent of the statute is to really get those people who are really individuals who are living in New York, who are residents of New York State. That is the eintention of the actual statute. So you look at the facts of the Gaied Case. The taxpayer lived in New Jersey and had a home in Staten Island that his parents used, heworked in Staten Island and owned an auto repair shop. And he would go to his parents' house once a month to help them with their medical bills and gave them transporation, whatever they have to do. And when he stayed there, hedid not have a bed, did not have a room, slept on the couch. Didn't have any clothing there, anything there establish its belongings there. When he finished working, he returned back to his home in New Jersey, from Staten Island.
When he actually moved from New Jersey to New York, he moved to with a separate apartment, not related to his parents' house. So based on this, the court of appeals said that that he doesn't have a permanent place of aboad.. There's no residential interest in the apartment that he had. So it wasn't a statutory residency.
So moving forward to seven years, 2021, the Coulson case extended this to vacation homes. And this is very important because a lot of our clients live outside of New York and have vacation homes. Here, the Coulson, or the petitioners, they had New Jersey and they had a home in Northville, New York, which I used it as a vacation home. And this home had two separate areas.
One area was an apartment for a tenant that was rented to a tenant. And the second part of the home was for their personal use. It had all the amenities of being a dwelling, it had a bathroom, it had a kitchen, it had all the hot water, everything that you would want to have a dwelling place. And they used that place exclusively for their own for two weeks out of the year. And they maintained it year round and they can access it as they want during that full year.
The Administrative Law Judge found that this vacation home had the physical characteristics of a home, made it suitable for year-round use and concluded that it was a permanent place of abode. And the actual Tax Tribunal upheld this case and agreed with the Administrative Law Judge and said that the Petitioners had residential interest in the home.
They had a right to reside at the dwelling and they maintained living arrangements at the home, exercise that right to use the home. And they used it for two weeks out of the year. And they distinguished this from the mere cottage or camp that was used for vacation purposes only because they can use this home for any other reasons besides vacation. And they can live there if they want it to. And so based on that, they actually ignored the fact that it was considered to be a vacation home, and they said that even though he thinks the vacation home, it really is a place of abode, a permanent place of abode. And now this is important because of the fact that we have these clients who might have these vacation homes. So you want to be cognizant of this fact that the vacation home could really be a permanent place of abode. And then he must look to the day count and thatbecomes the issue here.
Any part of a day in New York is going to be New York day. And that comes from the matter of John Zannetti case that was decided in 2015. And it's very important that the taxpayer establishtheir burden of having a day in New York or outside of New York. And that can be done by using your telephone record, your charge card records, EZ pass, ATM, your travel records. It's very important as Mitch said, to have a very detailed records and have detailed calendars to show the days that you were actually in New York and outside New York.
The question that we got from the question about being in Europe for three weeks, that's actually a good fact because when you're in Europe, you're not in New York and those are non-New York days. So those days would not be New York days for purposes of this analysis.
Stephanie Hines:Hey, Andrew, can I jump in for a second?
Andrew Cohen:Yes, sure.
Stephanie Hines:And Mitch had mentioned this a little bit ago, just as far as statutory residents for New York and being the same for New York City. And so I think worth emphasizing that New York City does have those same statutory resident rules. All of us have mentioned keeping records as being critical, and it does really make a difference.
I have a client who is actually currently going through New York residency audit, pardon me. Their records are in such good order as to your note credit cards. Moneo, Strava, attract my ride. There's absolutely no question as far as where he was.
So we can go through and we can present it to him without worry. But then you come into a consideration where in your case for a taxpayer that you recently dealt with, that we were talking about yesterday where they're Westchester residents, but still held in New York City of permit and use the city. So that intent there was for them to be a Westchester, so New York State domicile, but ended up getting pulled in for statutory or potentially pulled in for statutory residency. And it comes down to today's count. So why don't you walk through that just to clarify state and city as well?
Andrew Cohen:Yeah. So one of the things that looked at there is what days he was in New York City or not. And some days he would entertain, have dinner and then stay over past midnight. And those days were also New York days. So if you're in New York State or New York City at 12:01 midnight, that's another day. When he traveled a lot, those days were not-New York days. So those are good days for us when he traveled outside of New York State. And also look to where he was in the weekends and the credit card records. Did he dine in his favorite diner or did he shop in Westchester? And I looked at the actual EZ pass records? Which way was he coming on Sunday and Monday to work? Was he coming Westchester to New York or Manhattan bound toWestchester? Those are some of the facts I looked at it to see what days he was actually in New York.
I create this calendar of every single day and tracked every single day. And it turned out to be at the end of the day, it was 183 daysand I was able to get that to stick, andwin the audit by one day. And that saved the taxpayer about $2 million of taxes in New York City. That just one day.
So every day is important. You must focus on every single day and track where he was at that particular day, use the records to your benefit. Use your credit card bills, your telephone records, where you made your calls are important, your cell phone records, wherever you've actually sending text messages or data comes into play here, all these facts are important to establish where you were on a particular day. And with that, I want to turn this to Mitch to talk briefly about, if you've changed your domiciles, you can still be taxed in New York when you have non-resident income.
Mitchell Novitsky:Thank you, Andrew. On what it's just to follow up, they'll ask for the cell phone records. So use the cell phone on a weekends when you're at a New York or New York City, you want to establish, they can tell from the cell phone towers where you are at any given time. So that's very important. And one of the thing with the place of abode, it's not just yourself. As Andrew mentioned in following up, I've had cases where if the employer maintains the place of abode for you, spouse or relative a trust that all counts as being maintained on your valve. So just be aware of those things.
So then the final thing, and I'll cover this real quickly. I get a question. Sometimes I moved out. So if I moved out of New York, why am I still paying New York tax after I moved out of New York? So you will pay New York tax as a non-resident just like those individuals that are living in Jersey, working in New York in certain situations. It's got to be income sourced to New York State. New York City doesn't tax non-residents, New York State taxes non-residents and most other states generally are going to tax non-residents.
What is income source to the state? If you have real, tangible property located in the state, let's say you have a property, you rent it out and you get rental income, or you sell it services performed in the state. If you're working for your employer in the state, you'll still pay taxes. And non-resident, if you have an S-corp and you're a shareholder on your flow-through income, if you conduct a business or trade in New York, you'll be taxed on that. If you're a partnership you flow through income will be taxed to you as a non-resident and confirmative state or trust income related to a business.
I want to mention the convenience of the employer rule, because there was a case just yesterday, those of you tax people on the phone that New Hampshire sued Massachusetts, they have this convenience of the employer role. The Supreme Court unfortunately declined to hear it. So therefore, I think New York State is going to be even more brazen with its application of this. The convenience of the employer role is if you live in, let's say in New Jersey, but work for a New York based employer, any days that you work outside of New York, if they're for your own convenience, those are still considered New York days. And they held at the same thing applies during COVID.
So even though all of these individuals during COVID were working from their homes in Jersey or Connecticut, New York still tax that income, there is a mechanism for resident credit. If you're in your state and you're paying taxes to New York as a non-resident, it doesn't always make you whole, but just realize that convenience in the employer role is here and it's here to stay.
Now, also, when else will you be subject to tax? Even if you've moved down? Certain retirement income is excluded by statute as a federal provision 114 with pensions qualified pensions or deferred comp basically any pay outs over 10 years or more, less than 10 years, they could still tax it. If it related to services performed in New York, there are certain exclusions. But at the end of the day, you realize, and this is very key because we have clients saying, "I'm changing my residency and I'm getting a big payout in another month or two," I guess I don't have to pay New York tax on it. No, if it's fixed and determinable at the time you change, they look at accrual method of accounting, they determine that unless it's totally contingent and each case is different.
When I have clients, I say to them, "Show me a copy of the document, what the payout relates to." You still could pay taxes if the income related to services performed in New York and you're receiving it after you no longer are a resident of New York State. So remember if you're not a resident, you'll save significantly, but there still will be some items that may still be taxed as income from New York State, not city, because it's linked to the income source to the state. And on that, I'm going to hand the baton over to Charlie to talk about Puerto Rico.
Charles Brezak:Okay. Thank you very much. In the interest of time, I'm not going to go over the same ground that my colleagues have gone over in terms of changing domiciles, but I'm going to highlight some of the key areas that I think are differences that you have to be aware of. And I'd like to also spend a couple of moments on the benefits of Puerto Rico and make sure that it's understood as to why Puerto Rico is being considered and why it's sort of on the list of items that we're going to talk about in terms of moving out of New York State.
So right now let's talk about the benefits. So I could sort of set the table as to why Puerto Rico was attractive. If you want to basically move out of the United States generally you have to change your citizenship and you pay an exit tax.
So if you want to become a resident of the Cayman Islands, there's a huge cost associated with that. And you end up giving your US citizenship away. However, Puerto Rico is a possession. So in many respects is treated as a foreign entity, but you can enter the portals of the benefits associated with Puerto Rico as a possession, and therefore allows you to retain your US citizenship and not pay the exit tax.
So that's just the very important connotation in the whole discussion that we're going to have, that you retain your US citizenship and don't have to pay the exit tax on any potential appreciation or any of your assets portfolio.
The other point that I wanted to make is that as far as the taxability, once you become a bona fide resident to Puerto Rico, which we'll discuss some of the differences briefly between bona fide resident and domiciliary, because I think it's important, you're allowed to have your business income taxes as low as 4%, and your potential capital gains are exempt. Although you may have to pay US taxes on the appreciation up to the point that you became a bona fide resident.
The key point here on the third bullet point is this year move exception versus the requirement that an individual must be a bona fide resident for the full year. This is a critical difference because with regard to some of the discussions in the first part of the presentation, we're talking about a specific date with regard to a mid-year move. And when you start your change of domiciled in Texas weren't Florida.
However, section 937 requires you to be a bona fide resident for the entire year. In other words, you have to have done everything on December 31 of the preceding year, so that everything is done completed in full for the entire subsequent year. The only exception is what they call a year of move exception. And that requires that you have become a bona fide resident in the sense that you have 183 days for the year, but in the second half of the year, the full second half of the year, you have a closer connection as well as a tax home in Puerto Rico. So that basically indicates that if you do that, you're going to be a bona fide resident for the full year.
Now, obviously the window is just going to close on this in a couple of days. So it's very challenging to meet this change of move exception or your move exception for this year, because you really would have had to do everything to establish a closer connection and a tax home with the second half of 2021.
But I just wanted to mention that because following the point that Mitch was making sooner is better than later. You basically, if you're doing this for 2022, assuming that you haven't qualified already for the year move exception. 2022 is the first year, but you basically have to do everything prior to January 1st, 2022 to qualify. So I just wanted to mention that particular point.
The other point that we wanted to talk about really is the difference as we go through this, because we're going to be going against the clock here. Go to the next slide. I wanted to basically indicate why is Puerto Rico so attractive? What's the policy reason associated with that?
Well, the original policy reason was that from the US tax code, we were going to help the possession, whether it's Puerto Rico, USPI Guam by making it easier for people move there. And then the revenue would all go to those possessions. And that way the possessions would get financing.
But because of all of the issues that occurred over the last several years, it looks like these possessions, especially Puerto Rico decided not only to allow for the exemptions that are provided under 937, but give you a tax holiday except for maybe a 4% tax in the possession. So now you have this utopia that's come up and presented itself that makes Puerto Rico so attractive. That is, you have a statutory provision that exempts you from US taxes on Puerto Rico source income, if you're a bona fide residents.
Then you can qualify as well for a lower tax or even an exemption on your Puerto Rico source income, as far as Puerto Rico is concerned. So you have these two jurisdictions simultaneously giving you these tax breaks, and that's what makes it more attractive.
Just to emphasize that the idea isn't Puerto Rico, you're going to be basically reducing your federal income tax. Whereas if you go to Florida, you won't, that's just not an info commercial Mitch, I'm just putting that out there for Puerto Rico.
So we covered days of presence in one sense or another. So we'll move past that. Tax Home, I think is very important consideration on the 937, which is you can have your principal business in Puerto Rico and thereby meet the tax home test, but it's one of those things that is required under your meeting, the three tests, which are outlined here, which is the 183 days, the tax home test and the closer connection test. Good.
Next. So on the closer connection test, which is the third test that's required to become a bona fide residence, I just wanted to sort of reiterate what Mitch was saying and the prior speakers were saying about establishing, well of have these contacts with Florida, and now it's Puerto Rico. But there are specific rules in this closer connection test, as far as 937 is concerned.
The rules relate to certain policy decisions that the regulations have to have, because obviously it's very, to sort of move your whole family to Puerto Rico and sometimes to do to schools or some other necessity, you'll have a situation where your family stays back. And when the regulations were being written 2006, there was a question as to whether having your family in the US would automatically exclude you from being a bona fide resident to Puerto Rico.
So fortunately the regulations take a more measured approach and the state's an important factor, but it's not automatically a deciding factor. They'll look at all facts and circumstances. And then in addition, when you're looking at all the different factors, there was some policy decisions that had to arise with regard to whether it would be majority of factors or not. And they said, "We're not following majority of factors test. We're going to look at the composite facts and circumstances."
So I think that some of the things that may be disqualifications in New York State, or New York City, you could still possibly become a bona fide resident to Puerto Rico at the same time. I think that's the point that I want to drive home that 937 and the exemption rules for Puerto Rico that have to be applied for under act 60 can be met. In theory, even if New York State doesn't allow you to be treated as a non-resident. So you have to basically look at both sets of rules, the rules of New York State, or brazen to use Mitch's word. But, the words in 937 are a little less brazen. Let's get the last slide. I'd like to wrap up by talking about domicile. You've heard domicile and domicile and domicile.
Well, the idea is that a 937 and with Puerto Rico, it literally is not the same concept. There are factors, the tax home closer connection, but at the same time, there is some provision set that actually say that, "Look if you go for this year move exception, you have to be resonant for three years." That's sort of connotes that you could actually move back after 10 years, if you don't like it.
Whereas we know in New York State, that's not going to be tolerated, but it looks like the statute actually allows for that. In some respects, of course, you have to have a bona fide residency, but we wouldn't recommend you move back after one year or two years, at least three years.
But I think it's important to understand that domicile is not sort of the touch point for 937 and for Puerto Rico. And that you have to look at your own situation. And Mitch went through all the documentation that could apply. And I think it's the same thing for us. So you have to coordinate planning. I usually bring Mitch in if I'm doing the Puerto Rico side, I'll bring Mitch in on the New York State side. So with that in mind, I'd like to turn it back over to Lexi who was going to wrap up the discussion. Thank you, Lexi.
Transcribed by Rev.com
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