We often hear about New Yorkers fleeing to non-tax states such as Florida, which has no income or estate tax. Wealthy New Yorkers (and not so wealthy) are concerned that they will be subject to a New York estate tax to the extent that their combined estates (with their spouse) exceed the current New York estate tax exemption of $5.7 million. There is a substantial New York estate tax to the extent that this exemption is exceeded. The exemption will go up each year by the cost-of-living, but for now we are dealing with a $5.7 million exemption.
New Yorkers are also concerned about New York’s income tax. Many residents fleeing to Florida feel that they can avoid this income tax. A New York resident is taxed on all earnings, regardless of the source. A nonresident is only taxed on New York source income.
The New York Department of taxation is stepping up efforts to stem the flow of New York taxpayers to nontax states.
The big question is how to change residency and domicile from New York to Florida or to some other non-tax state. The prevailing view among many New Yorkers fleeing to a nontax state is they only have to sign some forms indicating that they are a domiciliary of Florida, change their driver’s license to Florida, and stay there for 6 months and a day. This only works for estate tax purposes if combined with “primary factors,” including a change of domicile.
In order to become a nonresident of New York for income tax purposes, two things have to occur:
- Absence from New York for 183 days; and
- A change of domicile to another state. For estate tax purposes, a change of domicile is all that is needed.
The 183-day test is easy to prove through the use of a calendar, credit card receipts, utility bills, and cell phone records, showing an absence from New York for more than 183 days.
To determine change of domicile, New York State takes the position that there must be clear and convincing evidence to determine from the “primary factors” that there has been a change of domicile. It is the quality of the factors that count, not whether a majority of the factors are met.
To establish a new domicile, a person must show an intent to abandon New York as his or her domicile coupled with a move to a new location with the bona fide intention of making a fixed and permanent home at the new location.
The primary factors are:
- Home – This is probably the most controversial of all five factors. Many people believe that all they have to do is sell their home to a trust or their children and lease it back and that will be sufficient to eliminate the home as a factor. This is not enough. What is changed by this transaction? Probably nothing. It doesn’t hurt, but it certainly doesn’t help unless the taxpayer can rely upon other primary factors.
Selling the primary residence and moving to a lake house or similar residence for the warm months certainly helps. Spending summertime in New York does not count against the taxpayer unless it leads to a violation of the 183-day rule.
Selling the home as part of a plan for downsizing and acquiring another residence in Florida is a very strong factor showing change of domicile. If a person retains the New York homestead and then acquires a larger home in a nontax state, this should lead to a change of domicile if the other primary factors are favorable to the taxpayer.
- Active Business Involvement – If you are still actively involved in a New York business, this will count against you. It will also generate New York source income, even if you do change your domicile to Florida.
- Time – Time spent in Florida for purposes of domicile is different than the 183-day rule. The State Tax Commission looks to the significance of the change of time for purposes of domicile.
A significant change in time spent in a new state can be helpful in showing that there has been a change in domicile. However, if a person usually spends a little less than six months in Florida and then attempts to show a change of domicile by staying slightly more than six months, this will be of little help to the taxpayer. A significant change in time will be better, for example, if the taxpayer usually spends four months in Florida but then afterwards spends six to seven months there. This would be very helpful.
- Items that are “Near and Dear” – These include collections, family photographs, family heirlooms, works of art, and items which have a significant sentimental valuable to the taxpayer. If “near and dear” items are transferred to the new state, this will be an important factor in determining whether there’s been a change of domicile. If the “near and dear” are left behind in a New York residence, it is an indication that the taxpayer intends to return to New York where the items are located. This works against a change of domicile.
- Family Connections – Where are the children located? If they live in other states or in the state in which the new domicile is claimed, this is a major factor in determining domicile. For instance, if you’re moving to Florida and your child or children are located there, it is strong support for a change of domicile, particularly if the other primary factors are in your favor.
If the primary factors do not lead to a conclusion of domicile, then the “other factors” or secondary factors come into play. These “other factors” are mentioned above but, in addition, may include: the address at which bills, bank statements, etc. are received, the physical location of safe deposit boxes or family records, and naming New York as your residence in various documents such as a will or trust. Although a person may attempt to change domicile by doing these “other factors,” they will not help without favorable primary factors showing that the person has changed domicile from New York to another state.
In short, a person changing residency from New York to another state must show that he or she was out of New York State for at least 183 days and, most importantly, that there has been a change of domicile based upon the primary factors. The burden of proof is upon the person claiming the change of domicile.
Anyone planning on changing domicile to another state should review the New York State Department of Taxation Nonresident Audit Guidelines which can be found on the Internet.
Written by Jack M. Battaglia, Esq. – Jack is Senior Counsel in Boylan Code’s Trusts and Estates department. He concentrates his practice in tax controversies and estate planning. His extensive experience in tax law includes practice before the IRS, the Tax Court and Federal District Courts.
This article will be published in The Daily Record in May 2019.