STATE AND LOCAL TAXATION

April 2000

TAXED LIKE A NEW YORKER: LIKE IT OR NOT

By Irwin Mittleman, CPAs

A famous entertainer recently sued her former financial advisors for malpractice. The issue revolved around whether she should be classified as a New York statutory resident because she maintained a New York permanent place of abode for 183 days or more in 1992. Her financial advisors had her file a California resident return that year. Two criteria, with subtle, complex distinctions, determine an individual's state of residency: domicile and permanent place of abode.

Domicile is the permanent home of the individual or where the individual eventually intends to return whenever absent.

Because domicile is a question of an individual's state of mind, the courts and administrative tribunals usually analyze certain external factors to establish their findings. These factors include voting record, driver's license, and social affiliations. After the trier of fact establishes that domicile is in a particular state, the courts or administrative tribunals look to how the concept of domicile fits with that state's definition of residence.

The New Jersey residency statute defines a resident taxpayer as "an individual who is domiciled in the state, unless he maintains no permanent place of abode in the state, maintains a permanent place of abode elsewhere, and spends in the aggregate no more than 30 days in the taxable year in the state."

The New York and Pennsylvania statutes defining a resident are virtually the same, although the New York statute dealing with residency allows an exception "when a domiciliary is in a foreign country or countries for at least 450 days in a 548 consecutive day period and he or she does not maintain a permanent place of abode in the state for his or her spouse."

Most state residency statutes provide a second test that does not include a determination of a person's domicile but usually refers to the maintenance of a permanent place of abode in the state asserting residency.

The New Jersey statute taxes individuals not domiciled in the state as residents if they "maintain a permanent place of abode in the state and spend more than 183 days of the taxable year in the state unless in the U.S. Armed Forces." The New York and Pennsylvania statutes track the New Jersey language in taxing nondomiciliary residents.

Future Considerations

Residency will become a hot issue in the next few years because the growing elderly population will be cashing in their recent stock market gains, often in low- or no-tax states. Also, recent Federal legislation lowered the Federal income tax rate on long-term capital gains and precluded nonresident states from taxing pension income.

Many individuals that become residents of states with no income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) can have their capital gains taxed at a maximum Federal rate of 20% with no state liability on those gains.

These factors would indicate that states with high tax rates will be especially aggressive in characterizing individuals that maintain multiple residences, or can be classified as domiciliaries of that state, as resident taxpayers. *