Home Is . . . Where the Domicile Is?

August 31, 2012 | Trusts, Estates & Taxation

While “home is where the heart is”, “domicile” is where the tax savings reside.  Determining one’s domicile becomes very important when a person has connections with New York and another state, and they want to avoid being subject to New York State tax. 

New York State Tax Law Section 605(b) says simply that if you’re in New York for more than 183 days a year and you have a permanent place of abode here, you are a “statutory resident” of New York for income tax purposes. However, under some circumstances, even if you pass the 605(b) test (i.e. you spend less than 183 days in New York), you can still be declared to be a New York resident for income tax purposes if you are domiciled in New York. 

The general rule is that residency, or more specifically, domicile is defined in terms of one’s intent.  Domicile is a term of art that defines one’s legal residence; the place where you wish to make your home. You can have several residences or places of abode, but you can have only one domicile.  Proving domicile, however, is more difficult than just stating your  preference of living arrangements particularly here in New York State where the Department of Taxation and Finance (the Department) is keen on classifying New Yorkers as New York residents even after they’ve moved.

Determining intent isn’t always easy, but the Department has an aggressive Audit Program directed at “former” residents to determine this issue. The audits generally affect both income taxes while you are living, and estate taxes after your death.

These audits result in more than $100 million of additional tax revenue to New York each year.

The Department’s guidelines instruct its auditors to look for four (4) major factors to determine intent: 

  1. New York Business; 
  2. Home;
  3. Time; and
  4. Items Near and Dear. 

In assessing the New York Business factor auditors will ask for phone, email and fax records, as well as other evidence of active participation in the business to conclude that a retiree, for example, hasn’t really left his or her New York job. If a retiring entrepreneur retains a significant management or supervisory presence, or a policy-making role in the business, it won’t matter that it’s from long distance.  In regards to the second factor, Home, auditors will visit homes in both locations to compare size, value, nature of use and other factors including where key possessions are located. 

For the third factor, auditors look very closely at the “quality time” issue. Is the social life centered in New York or the new state? Is your social life still primarily revolving around the children and grandchildren in New York? Did you resign or downgrade to out of state memberships at their New York clubs and other social organizations? Do the taxpayers have new friends, clubs, etc. in the new state? Auditors will ask for diaries, appointment logs, calendars, credit card receipts, ATM records, telephone records and any other evidence of “overall living patterns” that will provide clues to the intent of the  taxpayer. 

Finally, with the Items Near and Dear, auditors will ask for bills of lading and other shipping records, copies of homeowners insurance policies and the like, to establish where the items “really” are, when they were shipped, etc.  In addition to the above four factors, the final item that is sometimes considered by auditors is the Family Connection.  However, auditors are instructed that because of the “intrusive nature” of this factor, they are not to consider it unless no domicile determination can be made after a careful analysis of the first four factors. This inquiry basically involves a much more intrusive examination of Item #3 – what is the “commitment” for “quality time” back in New York?

The audit guidelines also list “Other” factors to be considered if a determination can’t be reached after analysis of the “major” factors. Some of the Other factors could obviously be considered as part of one or more of the major factors, but the Department doesn’t place much emphasis on them as independent factors because many, in themselves, constitute symbolic actions totally within the control of the taxpayer. A sampling of the Other factors listed in the audit guidelines are: address to which bank statements, bills, correspondence, etc. are sent;  location of safe deposit boxes; state of driver’s license, car or boat registration, etc.; where  Federal Income tax returns are filed; Voter Registration location, but more importantly, whether the voting right is actually exercised – not just in November, but local municipal and School Board elections, etc.; type of telephone, computer and cable services at each location; listing of taxpayer’s domicile in Wills and other legal documents.

When evaluating one’s intent, the guidelines make it clear that auditors are not permitted to consider charitable contributions and membership in religious organizations. In other words, if, for example, the newly minted Florida residents want to maintain their old New York charitable involvements and religious congregation affiliations, it can’t be used against them. Despite these admonitions to the auditors in the guidelines, common sense would dictate that, if possible, checks should be sent to Florida chapters of charities, and new affiliations be forged with Florida religious congregations similar to the ones enjoyed by the taxpayers in New York. Alternatively, at least make the new connections while retaining the old ones (e.g. split a $500.00 annual contribution to the American Cancer Society or Red Cross evenly between the Chapters in New York and Florida).

As with any audit, record keeping and accuracy will assist you in successfully establishing your intended domicile.  We recommend you keep a diary so that you can show when you were in your new domicile each year and prove your time outside your former domicile. Telephone bills, utility bills and credit card bills all may be indicative of where you were living, so make sure your calendar is accurate.  In addition, it is recommended that individuals seeking to avoid running afoul of residency audits purchase or rent a residence in the new state, execute a new Will or codicil and change your residence on all legal documents which recite residency such as drivers licenses, insurance, and voter registration. 

In the Winter 2012 edition of our newsletter, Part II of this article will set forth different methods to successfully avoid running afoul of residency audits.  The complete article is currently available now on our firm website.

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