August 26, 2020 – New York, United States
Escape from New York City: The Pandemic and Its Tax Implications
The phrase “unprecedented times” has often been repeated in the news when reporting about the current Covid-19 pandemic. Truth be told, we are not living in precedented times at all. In fact, if you know your global history, the world has experienced many plagues and pandemics far worse than the one it is experiencing now. However, there are aspects of this pandemic that lend itself to being described as unprecedented. For example, the virus itself acts in ways that scientists have never witnessed before in the life cycle of other viruses.
In a similar vein, New York City is experiencing events that are unprecedented. It is observing a mass exodus of its residents. They are moving out of the City to other parts of the state or out-of-state. With this mass exodus comes the questions being asked by taxpayers as to the implication a change of residency has on their 2020 tax bill. There is a lot of misinformation being circulated in the press and elsewhere that is convincing taxpayers a move out of New York City will reduce, if not eliminate, their City taxes. Cited here is a thumbnail’s sketch of the rules and regulations associated with residency and taxes. It is being presented here in the hope that it will prevent you, the reader, from making a grievous error. Consider this message wholeheartedly and you just may avoid being hit with a hefty City income tax bill comes Tax Day 2021.
In tax parlance, there is a clear distinction between domicile and residence. A domicile is the place you call your true home. This being the case, a taxpayer is only allowed one domicile at any given time. To change your domicile for purposes of the tax authorities in New York City, you are required to provide the authorities with “clear and convincing evidence” that your intention was to give up your old domicile in exchange for the new one. This does not necessarily mean you are required to sell your old domicile. However, the City will rely on five main factors to determine whether your intention was to change your domicile.
New York City tax authorities will liken your old domicile with the new domicile. That is, they will compare the nature and use patterns of both homes. Also taken into consideration in establishing a new domicile will be where the taxpayer spends the majority of his/her time. Taxing authorities will consider where the taxpayer is actively involved in his/her business ventures. For example, they will look into the location of the taxpayer’s continued employment or active participation in a business. New York City tax authorities will review the location of family members in addition to whether the taxpayer stores items of significant monetary and/or sentimental value in one location versus another.
If you are one of the New York City refugees and desire to establish a new domicile outside of Manhattan or its Boroughs, you can change the address on your driver’s license. If you moved out of state, you can register your cars in the new state. A New York City refugee should change all of his or her addresses on important legal documents such as wills or trusts. Finding yourself a new doctor or dentist close to your new home and having your mail sent to you at your new address are further actions you can take to establish clear and convincing evidence you no longer are domiciled in the City.
In any event, if you moved out of New York City in March when the pandemic began and have not yet returned, you will have been living as the resident of your new location for approximately 120 days. This is significant because New York City defines your residency via statute regardless of your domicile. Therefore, if you maintained a permanent place of abode in New York City and spent at least 184 days there, you would continue to file as a resident and owe the City tax. Since many people left the City sometime around March, there is a potential argument to be made by these taxpayers that since you only lived in the City for 90 days you file and pay City taxes as a part year resident. Nevertheless, taxing authorities do not view the statutory requirements within a vacuum. They will consider a variety of factors indicating the establishment of a new domicile such as the five factors mentioned earlier.
Recently, President Trump proposed a measure to be included in the next stimulus bill that would pose a problem for the New York City taxing authorities in its attempt to apply the above-mentioned rules. The measure in effect would tie the hands of the New York City tax authorities in its ability to extend its reach and tax New York City refugees. Pursuant to the proposal, Americans would pay state and local income taxes based on their primary residence rather than where their job is physically located. In applying such a regulation, Governor Cuomo posits that the law would hamper New York City’s recovery after the pandemic is over. Cuomo has determined that paying taxes for this period based on residency in another county or state without a consideration of the taxpayer’s intention of where they will return upon the pandemic’s fading away will hamper the recovery of big cities like New York. He predicts that quality of life will deteriorate since even basic services will not be able to receive funding.
Barring such a proposal from being passed into law, an analysis of the current state of the regulation requires a determination of its tax effect based on three definitive timeframes affecting domicile and residency. Those timeframes would be pre, mid, and post-Covid. By establishing these timeframes and the taxpayer’s actions during these three periods, it will be easier to determine whether an exodus from the City would still require filing and paying the City income tax. Someone who leaves the City mid-Covid to move to another home while subletting their New York City residence and working remotely for their New York City employer, with no intention of returning to the City until the pandemic is under control, will be hard pressed to maintain the argument that a new domicile has been established. This is especially true if conditions in the City return to pre-Covid conditions within 18 to 24 months from the move even though the statute does not include a definitive length of time. The fact the taxpayer is still maintaining a home in the City and works for their employer there will lend itself to an unsuccessful claim for a domicile change. However, if life changes significantly during mid-Covid such that the taxpayer is no longer assigned to the New York City office and a significant amount of time is spent in the new domicile, there may exist a successful claim for not having to pay New York City taxes. As a result, this taxpayer may be able to file a part year City tax return since the elements of the statutory definition of residency in New York City have not been met.
Whichever way one views a move out of New York City due to the pandemic, one should keep in mind that taxing authorities may view such a move very differently than you. Before attempting to make an argument with the taxing authorities that you have changed your domicile in the hope of obtaining a favorable tax treatment, you must have a thorough understanding of tax domicile and statutory residency rules. In any event, with such a mass exodus, and with so many people attempting to use such an exodus as a reason not to pay City taxes, you should be prepared to possibly face an audit by City taxing authorities if you claim a new domicile. This is especially true if you have significant income. By taking the necessary steps, as defined previously in this article, to establish your new domicile you may be able to argue in your own favor not to have to pay City taxes. However, in all likelihood, taxing authorities faced with this predicament will take an unprecedented stance of redefining and raising the threshold of evidence necessary to satisfy the clear and convincing standard.
About the Author
Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high net worth families and their advisors. Alicea has more than 17 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm. Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.
Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S. Alicea is fluent in Spanish and has a working knowledge of Portuguese.
Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York City Bar, the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA) and the International Fiscal Association (IFA). She is the New York/Northeast Regional Representative of the Women of IFA Network (WIN). Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.
Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.