Back in February, I promised to discuss nuances of the New York State residency rules. Today I begin to fulfill that promise. For taxpayers who currently work in New York or may in the future, this post is well worth the read. A quick refresher:
NYS residents must pay to NYS income tax on income from all sources, regardless of where the income is generated, or the nature of it. NYS nonresidents, however, pay to NYS income tax only on income actually generated in New York.
A taxpayer is considered a NYS statutory resident if she (1) maintains a permanent place of abode in New York; AND (2) spends more than 183 days of the taxable year in New York, unless such individual is in active service in the armed forces of the United States.
A taxpayer who works full-time in New York almost always easily satisfies (2). How about (1)? Suppose the taxpayer lives in her primary residence located somewhere outside of New York, such as New Jersey or Connecticut. In that case, the taxpayer cannot possibly be a NYS statutory resident, right? John and Laura Barker of New Canaan, CT, went to court to learn the answer: Wrong.
The issue in Matter of John and Laura Barker was whether the beach house the taxpayers owned in Napeague, NY satisfied the “maintains a permanent place of abode in NY” component to statutory residency. New York’s Tax Appeals Tribunal held that it did. To highlight the egregiousness of this decision, let’s look more closely at the facts.
Mr. Barker regularly commuted from his New Canaan, CT home to his office in Manhattan, where he worked as an investment manager. For the tax years in question, Mr. Barker filed New York State nonresident income tax returns, and paid NYS tax on the compensation he earned in Manhattan. Mr. Barker also had investment income during these years, and properly paid tax on this income to his state of residence, Connecticut.
NYS selected Mr. Barker’s nonresident income tax returns for audit, and claimed that by virtue of owning a beach home in New York, Mr. Barker was a NYS statutory resident and must also pay tax on his investment income to NYS.
If you read the court’s opinion, you’ll quickly realize the taxpayers spent very little time at this beach home: In 2002, 19 days; in 2003, 16 days; and in 2004, 18 days. The Barkers argued that because the beach home was not their permanent place of abode, they cannot be considered NYS statutory residents. Instead, Mr. Barker’s in-laws spent substantial time in the home, as the house was fit for year round use.
By keeping up the beach house, the Barkers ultimately sunk themselves. The court held that the beach house was a permanent place of abode as to the Barkers, applying an objective test to examine whether the residence is objectively suitable for year round living and the taxpayers maintain dominion and control over the dwelling. This test made the decision easy for the court to make.
Considered NYS statutory residents, the Barkers were required to file NYS resident income tax returns, and pay NYS tax on all of their income. You may be thinking, does that mean Mr. Barker pays tax on his investment income to both New York and Connecticut? You bet. The offsetting credits for this double state tax apply only to certain types of income. Timothy Noonan, who represented the Barkers before the NY Tax Appeals Tribunal, explains:
[U]nder New York Tax Law section 620, residents of New York are permitted to take a credit for ‘‘any income tax imposed for the taxable year by another state . . . upon income both derived therefrom and subject to tax under this article.’’ The regulations then define income derived from another state for purposes of Tax Law section 620 as compensation for services performed in that jurisdiction, income from a trade or business carried on in that state, or from tangible personal property situated in the other jurisdiction. The regulation specifically excludes the available credit for taxes paid to the other jurisdiction on income from intangibles. Connecticut has a similar rule. Thus, if a Connecticut domiciliary is subject to tax as a statutory resident of New York, Connecticut will provide a credit for New York taxes paid on New York-source income, and vice versa. But the intangible income? It gets taxed twice.
The resulting tax burden can be enormous. That’s why NY Assemblyman Fred Thiele and Sen. Ken LaValle recently introduced a bill offering tax relief to taxpayers with vacation homes more than 50 miles from their primary place of employment in New York. The Barkers surely could have taken advantage of this proposed legislation: Napeague is well over 100 miles away from Manhattan.
I’m not very confident this bill will become law, as providing relief based upon an arbitrarily determined distance seems overly simplistic. But I’ve seen crazier things happen in the state legislature, so you never know.