State Residency and Tax Issues During COVID-19

By Jennifer Prendamano  |  November 12, 2020

State Residency and Tax Issues During COVID-19

Due to COVID-19, many individuals have decided to, at least temporarily, move out of more populated areas to take up residence in vacation homes or other dwellings that are located in other states.  This has the potential to cause a dual residency issue for these individuals as both the state they left and the state they moved to may consider them residents for income tax purposes.

You are considered a resident of a state if you are: (1) domiciled in the state; or (2) a statutory resident of the state.

If you meet either definition, you are considered a resident of the state for income tax purposes.

Domicile

Your domicile is the place that you, in your own mind, consider to be your home.  It is the place that you would return to after an absence, such as a long vacation, hospitalization, quarantine, etc.  A taxpayer can have only one domicile at a time.  Once you are domiciled in a state, you remain domiciled there until you undertake sufficient actions which demonstrate that you have clearly established domicile in another state.  Leaving a state, even for an extended period of time, may not be sufficient to change your domicile.

Statutory Residency

In most states (and New York City), even if you are not domiciled there, you are still considered to be a resident for income tax purposes if: (1) you maintain a permanent place of abode there and (2) you spend more than a certain number of days (usually 183, but some states use a longer period) in that state during the year.

Let us look at the following example of how an individual can be deemed a resident by two different states at the same time:

Tom is domiciled in New York and is, therefore, a New York resident.  Due to COVID-19, Tom decided to temporarily move to his second home in Connecticut in April 2020.  Tom stays in Connecticut and works remotely for his New York-based employer from his home office in Connecticut for the remainder of 2020.  He intends to return to New York once the threat of COVID-19 has subsided.  Since Tom intends to return to New York after the pandemic is over, he will still be considered domiciled in New York.  In addition, he would be a statutory resident of Connecticut since he has a permanent place of abode in Connecticut and spent more than 183 days there in 2020.  Therefore, Tom would now be considered a “dual resident” of both New York and Connecticut for 2020.

Double Taxation and Crediting Provisions

Most states with an income tax, including New York State (and New York City), require their domicile and statutory residents to pay tax on their worldwide incomes regardless of where the income was actually earned.  In dual resident situations, an individual can be subject to tax on all of their income in two different states.  In order to avoid double taxation, most states provide tax credits for taxes paid to other states on earned income (i.e., wages).  However, some states may not provide credits for certain types of investment income (e.g., interest, dividends, capital gains and other intangible income, etc.)

Revisiting our example above, Tom’s wages earned while working remotely in Connecticut for his New York-based employer will be taxed by both Connecticut and New York, but Connecticut will grant credit against its tax for tax paid to New York on wage income.  However, neither state grants a credit against its tax for taxes paid to other states on investment income (interest, dividends, capital gains).  Therefore, both states will tax Tom’s investment income with no crediting offsets, and double taxation will result on his investment income.  This seemingly unjust result has been upheld in New York courts.

Possible Tax Planning

If an individual has not yet been in the state where they are currently residing temporarily due to COVID-19 for 183 days, it may be a good idea for the individual to return to their domicile state or, barring that, take up temporary residence in some other state for the remainder of the year in order to avoid being taxed as a “dual resident.”  Alternatively, the individual could abandon their old domicile and create a new domicile in the state they are currently residing in.  Sufficient actions should be taken which clearly demonstrate that you have abandoned your domicile in one state and established domicile in another state. Such actions could include, but are not limited to:

  • Sell your home, or at least list it for sale or lease it out to third parties for an extended period.

  • Move most, if not all, personal belongings out of your old home and into your new home, especially items near and dear to you.

  • Stay out of your old state as much as possible.  Keep a log of your whereabouts every day.  If New York or another state challenges your position that you moved, they will subpoena cell phone records and those will reveal where your phone was each day (and presumably you too).

  • Purchase a home in the state that you want to establish domicile residency in and have your spouse and children move into the home.  If you have minor children, withdraw them from their old school(s) and register them in your new place of domicile.

  • Surrender your driver’s license and get a new one in your new state of domicile.

  • Register to vote in your new state, and actually vote there.

  • Re-title and register your vehicles in your new state.

  • Engage medical professionals, get involved in the local community, etc. in your new state.

If you change your mind and decide to go back to your old domicile state in two or three years, this shows an intention to return and will be used against you, especially if you move back when or before you are being audited (likely one to two years after filing a nonresident or part-year resident return with the old domicile state).

Conclusion

Taxpayers should begin to evaluate whether they have been in their second home for more than 183 days (for most states, although some states use a longer period) in 2020.  If the time spent in their second home is approaching 184 days, they should consult their tax advisor regarding possible “dual resident” status and applicable filing requirements for 2020.

Click here to continue to read Private Client Insights, November 2020.


About Jennifer Prendamano

Jennifer Prendamano Linkedin Icon

Jennifer Prendamano, JD, is a Director in the Tax Services Group at Marks Paneth LLP. To this role, she brings nearly 20 years’ experience in tax controversy matters at the Federal and state and local levels as well as strategic state tax planning and consulting. Ms. Prendamano routinely handles complex state and local tax issues for large, multi-state corporations as well as high net worth individuals, and specializes in IRS examinations, state and local income... READ MORE +


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