Sooner or later, New York and California high earners who have been working from “anywhere” will be tempted to return home. The Vermont farm had its charms. Palm Beach is sweltering during the summer. There is only so much Austin BBQ one can eat. The shoulder seasons in a remote mountain town aren’t for everyone.
What these returnees have in common is that they left high-tax states. California’s top marginal income tax rate of 13.3% is second only to New York City, where the highest earners now pay 14.776% in combined city and state income tax. But if you lived outside of California or New York for most of 2020 and 2021 due to pandemic-induced remote work, you don’t have to pay double-digit income taxes for those years, right?
Wrong. Beginning in 2022 and 2023, the residency audits will begin, and they won’t be pretty. High-earning New Yorkers and Californians who claimed they weren’t residents in 2020—or 2021—will be audited, and most will lose, especially if they return home. Both states use sticky definitions of “residency” to protect their tax revenue.
For New York auditors, the first test is domicile change. You can have any number of residences but only one permanent home, or domicile. If you relocate to Florida but maintain a residence in New York, state auditors have an incentive to prove that you never changed your domicile. They consider five factors:
- How you use your New York residence;
- Active business involvement in New York;
- Where you spend time;
- Where you keep “items near and dear” like art, jewelry, and family heirlooms; and
- Family connections, such as where your children attend school.
If you successfully change your domicile, then you need to beware of statutory residency. Spend 183 days or more in New York, and you will be taxed as a full-time resident. Spend fewer than 183 days in New York, and you might not be considered a resident.
California’s "…underlying theory of residency is that you are a resident of the place where you have the closest connections," according to the State of California Franchise Tax Board. The so-called Closest Connections Test resembles New York’s domicile test and gives auditors numerous ways to make their case.
For example, where are your children, doctors, accountants, and banks located? Where do your financial transactions originate? Which state issued your driver’s license, vehicle registration, and professional licenses? Where are you registered to vote? Where do you get your dog groomed? Where are your social ties?
When you leave California, what matters is your intent. If you depart for a “temporary or transitory purpose,” you remain a California resident. If you claim to have left permanently—and therefore don’t owe 2020 or 2021 taxes—state auditors literally count and weigh your connections to determine where you have the closest ties. Of course, they are incentivized to consider you a California resident.
Nevertheless, the boldest of temporary emigres might think, I’m not paying 2020 income tax to New York—or California. I bought a home in Palm Beach, and I was out of New York for 185-ish days. What does 2020 have to do with me moving back to New York this year or next? For several reasons, that approach won’t get you far.
Factors to Consider
First, the burden is on you to prove that you legitimately moved your home or changed domicile. Because this is subjective, it is not easy to do, and auditors check everything. Do you have a mansion in New York and a smaller rental in Florida? Do you still see a dentist in New York? Do you buy a resident fishing license in New York? Are your troves of family photos and artifacts from the old country stored in New York or Florida?
Second, let’s say you convince auditors that you spent fewer than 183 days in New York. But you didn’t spend much time in Florida, either. You gallivanted around by boat, plane, or space shuttle. If you’re not really a Florida resident, then you’re still a New York resident, according to auditors. That line of argument is even stronger if you return to New York after just one year yet claim you weren’t a resident in 2020. Your move was temporary, and therefore you never changed your domicile.
Third, the burden of proof is on you to prove where you were for all 366 days in 2020—a leap year. Unless you documented your location rigorously enough to prove where you weren’t, auditors can assume you spent more time in New York than you declared. They will subpoena information to verify your locations. That can include social media posts, credit card statements, EZ-Pass records, key-card entry logs, and especially cell phone records, which contain thousands of pages of location data.
Fourth, any time spent in New York—whether for a business meeting, a doctor’s appointment, or lunch with a friend—counts as a full day. Only admitted in-hospital days, and some travel exceptions, may be excluded. If your purpose in New York is solely to board a plane, train, ship, or bus for a destination outside New York, or if you are transferring planes, trains, etc., in New York, it doesn’t count as a taxable day. But stop in New York for dinner on your way between Connecticut and LaGuardia, and it does count.
A Californian who moved to Texas in 2020 but returned in 2021 or 2022 would face scrutiny, too. They must have spent time in Texas for a “temporary or transitory purpose,” otherwise, why would they return home so soon?
Here’s the point: You can’t have it both ways with auditors. They know about all the New Yorkers and Californians who left during 2020. They know you don’t want to pay double-digit taxes on income any year, let alone a year spent in other states.
You have a choice: Stay in Palm Beach or Austin and enjoy not having a state income tax. Or, come home and pay. Whatever you do, don’t pick an audit you can’t win.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Nishant Mittal is senior vice president & GM of Business Travel at Topia, the leader in global talent mobility. He is also co-founder of Monaeo, Topia’s offering that uses location data to help individuals manage their personal income tax residency risk.
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