A state tax issue came up with a
client recently, and I was somewhat surprised by another CPA’s response. The issue arises when someone has tons of
interest and dividend income – that is, big bucks, laden with loot, banking the
Benjamins. Since I consider myself a
future lottery winner, it also means something to me.
Here it is:
Can you be a resident of two states at the same time?
The other CPA did not think it
possible.
There are a couple of terms in this
area that we should review: domicile
and place of abode. Granted in most
cases they would mean the same thing. For the average person domicile is where
you live. You are a resident of where your domicile is located. We future
lottery winners however frequently will have multiple homes. I
intend to have a winter home (New Mexico comes to mind), a summer home (I am
thinking Hawaii) and, of course, one or more homes overseas. Which one is my
domicile? Now the issue is not so clear-cut.
OBSERVATION: Let’s be honest: this is a high-end tax
problem.
Domicile is your permanent home. It
is the place to which you intend to return when absent, to which your memories
return when away, it is home and hearth, raising children, Christmas mornings
and planting young trees There can be only one. A domicile exists until it is superseded,
and there can never be two concurrent domiciles. It is Ithaca to Odysseus. It
took Odysseus ten years to get home from Troy, but his domicile was always Ithaca.
The concept borders on the mystical.
A place of abode can be an apartment,
a cottage, a yacht, a detached single-family residence. There can be more than
one. I intend to have abodes in New Mexico, Hawaii and possibly Ireland. My
wife may pick out another one or two.
Most states (approximately 30, I believe) use the concept of “domicile” to determine whether you are or are not a “resident” of the state. You can generally plan for these states by pinning down someone’s “main” house. A state can tax all the income of a resident, which is what sets up the tax issue we are talking about.
Then you have the “statutory” states,
among the most aggressive of which is New York. New York will consider you a
resident if:
(a) Your domicile is New York, or
(b) Your domicile is not New York, but
a. You maintain a permanent abode in New
York for more than 11 months of the year, and
b. You spend more than 183 days in New
York during the year
That “or” is not there because
New York wants to be your friend. That (b) is referred to as statutory
residency. It is intentional, and its intent is to lift your wallet.
How? It has to do with all those
interest and dividends we future lottery winners will someday have.
Let’s say that you live in
Connecticut and work in White Plains. You are going to easily meet the “more
than 183 days in New York” test. Unless you work at home. A lot. Let’s say you
don’t.
We next have to review if you have a
“permanent abode.” What if you have a vacation home in the Hamptons. What if
you have an apartment in Brooklyn. What if you rent an apartment (in your name)
for your daughter while she is attending Syracuse University. Do you have a
permanent abode in New York? You bet you do. The “permanent” just means that it
can be used over four seasons. We already discussed the meaning of “abode.”
Think about that for a moment. You
may never stay at your daughter’s apartment. It will however be enough for New
York to drag you in as a statutory resident because you “maintain” it. New York doesn’t care if you ever actually stay
there – or even step foot in it.
Great. You are a resident of both Connecticut
and New York.
So what, you think. Connecticut will
give you a credit for taxes paid New York. New York will give you a credit for
taxes paid Connecticut. The accountants’ fee will be wicked, but you are not otherwise
“out” anything, right?
Wrong. You may be “out” a lot, and it
has to do with those interest and dividends and royalties and capital gains –
that is, your “investment income.”
There is a
state tax concept called “mobilia
sequuntur personam.” It means “movables follow the person,” and in the tax universe
it means that movable income (think investment income, which can be “moved” to
anywhere on the planet) is taxed only by one’s state of residence. The system
works well enough when there is only one state in the picture. It may not work
so well when there are two states.
The reason
is the common technical wording for the state resident tax credit. Let’s look
at New York’s wording as our example:
A resident shall be allowed 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 trap here is the phrase “derived
therefrom.” Let’s trudge through a New York tax Regulation to see this jargon in
its natural environment:
The term income derived from sources within another state …
is construed as ... compensation for personal services performed in the other
jurisdiction, income from a trade, business or profession carried on in the
other jurisdiction, and income from real or tangible personal
property situated in the other jurisdiction."
Well, isn’t that a peach? New York
wants my interest and dividend income to be from personal services I perform
(that’s a “no”), from a trade, business or profession (another “no”) or from real
or tangible property (again a “no”).
New York will not give me a resident
credit for taxes paid Connecticut.
That means
double state taxation.
Yippee.
Can this be
constitutional? Yes, unfortunately. The Supreme Court long ago decided that the
constitution does not prohibit two states reaching the conclusion that each is
the taxpayer’s state of residence. The Court stated:
“[n]either the Fourteenth Amendment nor the full faith and
credit clause … requires uniformity of different States as to the place of
domicile, where the exertion of state power is dependent upon domicile within
its boundaries.” (Worcester County Trust
Co v Riley)
What did we
advise? The obvious advice: do NOT be in New York for more than 183 days in a
calendar year NO MATTER WHAT.
Our client’s
apartment is in Manhattan, so she also gets to pay taxes to New York City on
top of the taxes to New York State. I hope she really likes that apartment.
BTW New York
is NOT on my list of states for when that future lottery comes in.
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