Wealthy individuals who worked from another state during 2021 can almost certainly expect a state tax audit this year. And with remote work on the rise, the number of these dual-state workers is likely to be higher than ever.
There are several implications to the two-state work issue, according to Nishant Mittal, co-founder of Monaeo, an arm of global talent mobility solution provider Topia that uses location data to help individuals manage their personal income tax residency risk.
Every state is different, and each has its own rules. New York, like most states, examines change-of-residency claims very carefully.
“If you live in New York City and buy a vacation home or second home in Florida, you have to be careful about claiming that you’re no longer a resident of New York State,” he said. “You have to be able to convincingly prove that you have the intent to leave New York for good.”
“If you claim you are no longer a New York resident, you have to break ties with New York and establish ties to the new place,” he said. “You have to prove to New York that you’re leaving New York and that Florida is your new home.”
But if a taxpayer can show that they have relocated to another state, they may still be liable for New York tax if there is a dwelling place to which they have access. “It could be their parents’ place, or in their wife’s name — as long as they have unfettered access to a place of living and spend more than 182 days there, they can be a resident of New York for tax purposes,” he explained.
The test for changing a domicile is a qualitative test, according to Mittal, who co-founded Moneo after personally experiencing the pain of an audit caused by business travel. “A taxpayer can’t just go to a new place and get a voter registration, because the intent from a domicile perspective is to break the connection with New York and establish a connection to a new place with no intention of coming back to New York.”
While “domicile” and “residence” are often used synonymously, for New York income tax purposes, the two terms have different meanings. The state defines a domicile as a taxpayer’s permanent and primary residence where they intend to remain. An individual may have several residences, but can only have one domicile.
There are two risks to be aware of, MIttal indicated: “First, a taxpayer can pack up their bags and move to their second home and think they don’t have to file New York tax. They may not have the incentive to come back tomorrow, but if they return in 2023, it looks like they had no permanent intention to leave. And if they’re already back when they’re audited, they can’t say they had no permanent intent to leave.”
Even though taxpayers may be successful in asserting they are no longer residents, they are still liable for New York tax as a nonresident if they have income from New York sources.
“New York is very aggressive about going after high-net-worth individuals claiming to be absent from the state,” Mittal said. “For example, a taxpayer permanently relocates to Florida, but periodically travels to New York to meet with bankers or business colleagues. It’s the responsibility of my company to withhold on wealth I earned in New York. If the company is not doing that, it’s on the hook for those taxes.”
Under the “convenience of the employee” rule, if an employee, for their own convenience, decides to live somewhere else to perform the same work that they perform in New York, for tax purposes they are still considered to be performing the work in New York, MIttal noted.
States differed in the ways they responded to the telecommuting work environment, noted Jamie Yesnowitz, SALT leader in Grant Thornton LLP’s Washington national tax office.
“Some provided temporary guidance indicating that income tax withholding requirements would not change or that business tax nexus thresholds would not apply for companies with teleworking employees working in another state solely due to the pandemic,” he said. “Many states indicated that such guidance would expire on a specific date or when corresponding state emergency declarations were lifted. A number of states extended their temporary guidance or released new guidance to address issues related to income tax withholding, business tax nexus and income tax apportionment.”
