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| A Change in Domicile from New York to Florida Can Help Minimize Taxes By Allan R. Lipman MARCH 2007 - Retirees who have homes in both New York and Florida may be able to reduce or eliminate New York income and estate taxes, and also reduce the real estate taxes on their Florida home by changing their domicile to Florida. The benefit of doing so has been enhanced by the elimination of the Florida estate tax and the repeal of the Florida intangible tax on stocks and bonds, which went into effect on January 1, 2007. It has been further enhanced by the Florida constitutional amendment that places a cap of 3% on any annual increase in assessments applicable to a Florida homestead, but not to a Florida home owned by a New Yorker. Retirees who have a substantial securities portfolio have benefited from the 15% federal income tax on stock dividends and capital gains. In contrast, both the dividends and capital gains are subject to New York income taxes at a rate as high as 7%. Similarly, Congress has increased the federal estate tax unified credit to $2 million, while New York continues to impose its estate tax on estates greater than $1 million. The failure of New York to give comparable tax relief has motivated many New Yorkers with homes in both New York and Florida to consider a change of domicile to eliminate New York income and estate taxes in their entirety. Checklist to Determine Eligibility Not all retirees who own homes in New York and Florida are eligible to elect Florida as their domicile. Domicile is characterized in the New York tax regulations as the place that an individual intends to be his permanent home and the place to which he intends to return whenever he may be absent. The regulations provide that, once established, a domicile continues until the person moves to a new location with the bona fide intention of making his fixed and permanent home there. A person’s declarations are given due weight, but they will not be conclusive if they are contradicted by conduct. For example, the regulations state that registering and voting in one place is important but not necessarily conclusive. Likewise, the length of time customarily spent at each location is important but not conclusive. A person can have only one domicile. If an individual has two or more homes, the domicile is the one regarded and used as the permanent home. The leading case in New York was decided by the New York Court of Appeals in 1908 (Matter of Newcomb, 192 N.Y. 238). It remains “good law.” Mrs. Newcomb, during a 30-year period, and until she was 80, was domiciled in New York City. She generally resided during the winter in her home in New Orleans and resided during the summer in her residence in New York City. She wanted to make substantial bequests to Tulane University and was concerned that the will might be contested by her relatives. She consulted with a Louisiana attorney, who advised her to change her domicile by making an express declaration in writing to that effect. She signed a declaration stating that New Orleans was her permanent home and her place of domicile. It was argued that Newcomb resided in New York City and merely visited New Orleans, and that her later visits to New Orleans differed in no material respect from those made earlier. It was also argued that she sought to become a nominal resident of Louisiana merely for the purpose of making a Louisiana will and not for making a permanent home. The court rejected that approach and established the following rules for determining domicile when the retiree maintains two residences:
Demonstrating Intent Retirees who elect to make Florida their permanent residence should demonstrate such intention in a clear and convincing way by taking as many of the following steps as appropriate:
A change of domicile from New York to Florida will not save any New York income taxes if the retiree is present in New York in a calendar year for more than 183 days. Taxpayers will be considered “statutory residents” of New York only if they maintain a “permanent place of abode” in New York and are present in New York for more than 183 days. A diary should be kept, and a partial day is considered a full day. Therefore, if a retiree leaves New York at 6 a.m. on Friday morning and returns at 11 p.m. Sunday night, he will be considered absent from New York for only one day. In addition to a diary, the burden of proof as to the taxpayer’s physical presence can be onerous. The taxpayer should retain as much documentation as possible to support the entries in the diary. Failure to account for a day will be presumed by auditors to be a day inside New York. There are some exceptions to the general rule, such as when a retiree is confined to a New York hospital or is present in New York only to go to or from an airport. Savings in New York Income Taxes Certain income derived from, or connected with, New York sources will continue to be taxable in New York even if paid to the retiree after a change of domicile to Florida. For example, New York will tax items such as the distributable share of income from a former law or accounting partnership and rental income from New York real property. New York will not continue to tax income from annuities, dividends, and interest, even if from New York sources, unless the income is from property employed in a business, trade, profession, or occupation carried on in New York. In 1996, Congress passed legislation that prohibits New York from imposing its income tax on any retirement income of an individual who is no longer a resident or domiciliary of New York. To quantify the savings in New York income taxes, taxpayers may want to restate the most recent New York resident income tax return on a nonresident return and include only New York–source income. Savings in New York Estate Taxes The amount of New York estate tax is based on the net taxable estate as shown in the Exhibit. The following simplified examples illustrate the magnitude of the estate tax savings that will result from a change of domicile to Florida:
Marriage and Domicile Change Most married couples have the same domicile. When a change of domicile occurs, both spouses change their domicile at the same time. The primary residence of one is the primary residence of the other. But consider the situation where they have a home in New York and a home in Florida and the wife stays in Florida from mid-October until mid-May and is not in New York for more than 183 days during a calendar year. On the other hand, the husband returns to their New York home one week a month for business reasons while his wife stays in Florida. As a result, he is in New York for more than 183 days in each calendar year, although his wife is not. The husband and wife file a joint federal income tax return. The husband files a resident New York tax return. The wife has no New York–source income and files no New York tax return. The wife has substantial income from her stocks and bonds. The Florida home is titled in the wife’s name. She files a declaration of Florida domicile, registers to vote in Florida, receives a homestead exemption on her Florida home, and follows many of the items on the checklist. As a result, there is a 3% cap on any increase in its assessment. A New York auditor claims she must pay New York income taxes on the dividends and interest she receives because she has not effectively changed her domicile. The auditor points out that her husband retained a significant tie to a New York business and, therefore, she cannot change her domicile to Florida. The auditor cites the New York tax regulations: Husband and wife. Generally, the domicile of a husband and wife are the same. However, if they are separated in fact, they may each, under some circumstances, acquire their own separate domiciles even though there is no judgment or decree of separation. Where there is a judgment or decree of separation, a husband and wife may acquire their own separate domicile. [20 NYCRR 105.20(i)(5)] This regulation should be changed. A 2005 decision of the New York Court of Appeals recognizes that spouses can each elect their own domicile (Glenbriar Co. v. Lipsman, 5 N.Y.3d 388). Although the case involved an issue related to a rent stabilized residence in New York City, its reasoning appears to sanction a change of domicile by one spouse while the other remains a New Yorker. Caveat A change of domicile makes the laws of Florida, rather than New York, applicable, including marital rights. Although a New Yorker may have the requisite intent to make a domicile change, if challenged, such intent must be demonstrated by clear and convincing evidence, which requires a high degree of proof. The lack of such evidence may result in not only an assessment, but also substantial interest and penalties. Where the result is uncertain, a change of domicile should not be attempted unless the taxes that will be saved are substantial. No change should be made without professional legal guidance. Allan R. Lipman, JD, is a partner in the Buffalo, N.Y., law firm of Lipman & Biltekoff, LLP, and also has an office in Boca Raton, Fla. Some of the matters highlighted in this article are explored in more depth by the author at www.snowbirdguide.com where he also suggests how to respond to a domicile audit.
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