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: