Four northeastern states most affected -- New York, New Jersey, Connecticut and Maryland -- sued the Trump administration last week to invalidate the cap, saying it unfairly targets them. Years of litigation are likely to ensue, but some legal experts have said the states’ arguments are dubious.
‘Teddy Bear Test’
There are two main hurdles for New York residents looking to flee. The first is the domicile test, which requires proof that a resident moved to a new home with no intention of coming back. Submitting a change-of-address form alone isn’t enough, nor is obtaining a new driver’s license or registering to vote in a new district, though checking those boxes is still important.
Instead, New York tax collectors look at five factors: homes that are owned, how time is spent, where favorite possessions are kept -– the so-called “teddy bear test” -- and business activities and family ties. Potential relocators are finding they can’t just buy a one-bedroom condo in South Beach, but leave behind a 20-room palace in Westchester County, or kids in a Manhattan private school.
Former New Yorkers must meet another test as well, called the 183-day rule, if they move but then hold onto a home in New York state. They must prove that they haven’t spent more than 183 days per year in the state. The rules are strict: Any days without proof can be counted as a day in New York, and even a second inside the state’s borders can count as a whole day.
Auditors generally pre-screen transcripts of tax returns to unearth those that could have issues or require additional verification. They used to spend a couple weeks every year in a warehouse near Albany combing through pallets of tax returns for irregularities, but computer programs have made it easier for New York state to identify taxpayers who might be flouting residency laws, said Brian Gordon, former district audit manager in Manhattan and Brooklyn, who worked for the state for more than 30 years.
Taxpayers who move away just before a big spike in income, say from a severance package or the sale of a business, are likely to be targeted for an audit, Gordon said.
Those who have recently moved and make more than $500,000 are among those also likely to be scrutinized, said Annie Zhao, who spent seven years as a New York state tax auditor and now works at accounting firm Anchin. Taxpayers who seem to be on the cusp of spending 183 days in their new homes could also be caught in auditors’ crosshairs.
‘Unpleasant’ Audits
The tax issues created by a move can linger for years. Taxes are generally subject to a three-year statute of limitations from when a return is filed, but taxpayers who start spending more time in New York even years after they’ve made a move -- like around the birth of a grandchild -- may come to auditors’ attention and be forced to provide evidence of a move that happened a decade or more in the past.
“Residency audits are different from any other kind of audit,” said Christopher Manes, a tax attorney at Sanger & Manes who specializes in California residency cases. “It’s a lifestyle audit. It’s very unpleasant. It’s very expensive.”
Still, some taxpayers may still decide to head south after they file their tax returns in April and see how they really fare under the new tax law.