The current coronavirus disease 2019 (COVID-19) pandemic has affected day-to-day life as many self- isolate, limit venturing outside, and wear masks while social distancing. Additionally, many people are now working remotely either under government shelter-at-home orders or by personal choice. It may be that these changes are temporary and will end after a certain period. However, for some people, the experience of working from home may lead to thinking about changing lifestyles and moving from their current home and relocating as it may be possible to be productive from any location.

These types of life changes may also have business considerations. One of those considerations is how changing residence will affect an individual’s taxes. That has become even more important after the deduction of state and local taxes on federal tax returns was limited to $10,000 by the Tax Cuts and Jobs Act of 2017, making those taxes more burdensome than they had once been.

Even before the COVID-19 pandemic, many people may have considered changing their residency for tax or other reasons. For example, people living in states and localities with substantial state income tax rates may be motivated to consider a change. States’ income tax rates range up to 13.3%—with California having the highest rate. New York State and New York City residents have a combined tax rate of 12.696%, and Hawaii has an income tax rate of 11%. (There are five more jurisdictions with rates of more than 8% including Oregon, Minnesota, Iowa, New Jersey and the District of Columbia, and 24 states with rates at or approaching 5%). In addition, 12 states and the District of Columbia impose an estate tax and six impose an inheritance tax that may drive wealthy taxpayers to consider a move.

California and New York have had robust residency audit programs for many years and other states have considered residency audits. New York’s tax commissioner said the agency was seeking 100 additional auditors for its residency audits and the New Jersey director of the division of taxation also talked of increasing residency audits and hiring additional staff even before the huge reductions in state revenues due to COVID-19. Now the pressure to bring in additional revenue from audits could potentially increase.  

So, what should be considered when changing residency from one state to another? A good first step may include changing voter registrations, vehicle registrations or drivers’ licenses (auditors will assert tax liability if those steps are not taken).

What makes one a resident for state tax purposes varies from state to state; generally, there are two bases to find someone subject to tax as a resident. The first test is domicile. New York defines domicile similarly to other states as “the place that an individual intends to be such individual's home—the place to which such individual intends to return whenever such individual may be absent." Others define domicile as the place that must take you in when other places won’t. 

A person can have only one domicile even though they have many residences. A determination of domicile has as much to do with intent coupled with objective facts supporting that intent. Also, once domicile is established a change requires clear and convincing evidence of establishing a new domicile. Leaving one jurisdiction without establishing a real presence in the new one will not result in a change of domicile even if you dispose of your home and have no residence in the former state of domicile. Further, you may make a convincing case for a change in domicile, and still may owe tax as a “statutory resident” of a state. In New York, and many other states, a statutory resident is one who has a permanent place of abode and spends more than 183 days in the state.

States have various ways of articulating how they determine where a taxpayer’s domicile is located. New York has five primary factors: home, business ties, time spent, items near and dear, and family connections. Each of these primary factors contain aspects that the tax department requires their auditors to analyze such as the size, value and historic ties to a home; the taxpayer’s business connections and active business involvement; how much and the quality of time spent in the various locations and the patterns of where one spends time (auditors carefully examine where one departs from and returns to after extended trips); where items with emotional connections are such as family heirlooms, photos, stamp, coin, or art collections are kept and where the taxpayer’s family is located, including where holidays or significant celebrations take place. If examination of the five primary factors do not result in a clear answer, other factors are reviewed including where bank statements and other important documents are sent and stored (safe deposit box locations), licenses, car and voter registrations, and analysis of telephone and E-ZPass records. Connecticut, with a statutory definition of domicile for income and estate taxes that is substantially the same as New York, created a form Declaration of Domicile for its estate tax with 24 questions focusing on residences, businesses and licenses, where any litigation the taxpayer is involved in has taken place, medical services, and family in Connecticut. Answers to these questions that show ongoing contacts with the departing state will be cited to show that there has not been a clear demonstrable intent to leave.

Once an auditor approves that your domicile is in another jurisdiction, you may confront the issue of statutory residency if you have access to a permanent place of abode in the state seeking to tax you as a resident. What constitutes a permanent place of abode varies, but most often it refers to a residence with appropriate facilities to be used year-round including a kitchen and bathroom and that you can use. Having that abode and spending more than 183 days in the state could make you taxable as a resident.  

It is important to note that the two requirements are distinct. If you have a permanent place of abode in New York and spend all or part of more than 183 days anywhere in New York, the tax department will assert resident income tax is due. New York law also provides that spending any part of a day in New York (other than time spent in interstate or international travel and confinement to a medical facility) counts as a New York day for the 183-day test and the taxpayer has the burden of proving he or she was not in New York for more than 183 days. The record keeping can be extremely burdensome and even the most meticulous record keeper may not be able to document his or her whereabouts for the entire year. Auditors may argue, and cases have held, that “undocumented” can count as New York days.          

A residency audit is not like a financial audit where an auditor verifies income and expenses to determine the proper amount of tax due. Rather, these audits are intrusive, highly personal examinations of where you spend time, what activities are pursued and familial relationships. Auditors have been known to request a walk-through of a taxpayer’s home, interview housekeeping staff, doormen and local vendors to investigate where and with whom you spend time. These personal stories can be compelling or embarrassing and may make a residency audit into an examination of lifestyles and intimate relationships.

There have been cases where adult children testified about a parent’s alcoholism to establish that the other parent did not spend time in the marital home and where same sex relationships were questioned prior to those couples being able to marry and became issues in residency audits. Taxpayers in residency audits are questioned on credit card charges and in at least one instance an expensive gift made to someone other than the taxpayer’s spouse caused the client to concede the tax rather than have that gift become part of the record.

The current pandemic has caused many people to shift their lifestyles, particularly as it relates to working from home and conducting business from remote locations. As such, they may consider changing their residency for tax or other reasons. While changing residency for tax purposes is possible if done and documented correctly, it is not simple.

Glenn Newman is a shareholder at the law firm of Greenberg Traurig LLP.