ON the ROAD to FLORIDA. Cole Schotz s Practical Guide to Changing Your Residence from New Jersey or New York

Transcription

1 ON the ROAD to FLORIDA Cole Schotz s Practical Guide to Changing Your Residence from New Jersey or New York

2 Your How-To Guide for Saving Significant Taxes by Moving from New Jersey or New York to Florida By the Cole Schotz Tax, Trusts & Estates Attorneys Disclaimer IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii)promoting, marketing or recommending to another party any transaction or matter addressed herein. Attorney Advertising Cole Schotz P.C. is a New Jersey professional corporation with offices in New Jersey, New York, Delaware, Maryland and Texas. Portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique to each representation. Cole Schotz P.C. has its principal law office at Court Plaza North, 25 Main Street, P.O. Box 800, Hackensack, NJ, 07601; phone The content of this publication was relevant as of November 1, Cole Schotz P.C.

3 Table of Contents Introduction...1 Chapter 1 New Jersey and New York Tax Rates...2 Chapter 2 Definition of Resident Taxpayer for Income Tax Purposes the Key Is Domicile...10 Chapter 3 Special Considerations for Principal Residences...24 Chapter 4 Special Situations...27 Chapter 5 Definition of Resident Taxpayer for Estate Tax Purposes...29 Chapter 6 What to Do When You Arrive in Florida...34

4 Introduction Introduction Our Florida guidebook was first introduced in April of 2010, when many of the estate tax laws were unsettled. At that time, we were in the midst of a one year estate tax repeal with a scheduled return of the federal estate tax on January 1, A lot has happened since then. As of January 1, 2013, the federal estate and gift tax exemption is permanent. The exemption is $5 million, indexed for inflation each year. In 2014, the estate and gift tax exemption is $5.34 million*. While the federal exemption will increase annually with inflation, the New Jersey exemption remains the same ($675,000). The New York exemption was increased as of April 1, 2014 and is set to equal the federal exemption by As the disparity between the New Jersey and federal exemption grows, the impact of New Jersey estate tax becomes even more dramatic. Meanwhile, the New York exemption amount provides its own challenges, which we will explore throughout this guidebook. In addition, we continue to see increasing numbers of relocations out of New Jersey and New York to Florida by individuals hoping to escape some of the highest state income taxes. The purpose of this reference guide is to provide a practical road map of the issues that need to be considered to effectively change a taxpayer s residence from New Jersey or New York to Florida for income and estate tax purposes. Many factors make perfect sense, while others are based on statutes and case law established in New Jersey or New York. We will review them all. Our experience has been that this guide will give you a clearer understanding of all that can be done within your control to successfully change your residence from New Jersey or New York and to avoid the common pitfalls. The Cole Schotz Tax, Trusts & Estates Department is ready to assist you with your deliberations about changing your residency and implementing the strategies you need to minimize the attendant tax erosion. We offer comprehensive estate planning to ensure that you minimize your estate taxes and achieve your wealth transfer goals. *On October 30, 2014, it was announced that the estate and gift tax exemption is $5.43 million in

5 Chapter 1 New Jersey and New York Tax Rates Chapter 1 New Jersey and New York Tax Rates New Jersey Personal Income Tax New Jersey resident taxpayers (as defined in Chapter 2) are subject to an annual income tax on their New Jersey gross income. The tax is imposed at graduated rates according to the following schedule: Married Filing Jointly If New Jersey Taxable Income Is: The Tax Is: $20,000 or less 1.4% of taxable income $20,001 $50,000 $280 plus 1.75% of the excess over $20,000 $50,001 $70,000 $805 plus 2.45% of the excess over $50,000 $70,001 $80,000 $1, plus 3.5% of the excess over $70,000 $80,001 $150,000 $1,645 plus 5.525% of the excess over $80,000 $150,001 $500,000 $5, plus 6.37% of the excess over $150,000 Over $500,000 $27, plus 8.97% of the excess over $500,000 A taxpayer s New Jersey gross income includes compensation, interest, dividends, pension income and gains received from the sale of property. 2

6 Chapter 1 New Jersey and New York Tax Rates Single If New Jersey Taxable Income Is: The Tax Is: $20,000 or less 1.4% of taxable income $20,001 $35,000 $280 plus 1.75% of the excess over $20,000 $35,001 $40,000 $ plus 3.5% of the excess over $35,000 $40,001 $75,000 $ plus 5.525% of the excess over $40,000 $75,001 $500,000 $2, plus 6.37% of the excess over $75,000 Over $500,000 $29, plus 8.97% of the excess over $500,000 3

7 Chapter 1 New Jersey and New York Tax Rates New York Personal Income Tax New York resident taxpayers (as defined in Chapter 2) are subject to income taxes from all sources, regardless of whether the income is attributable to New York activities or property. The tax is imposed at graduated rates according to the following schedule: Married Filing Jointly If New York Taxable Income is: Not over $16,450 The Tax is: 4% of the New York taxable income Over $16,450 but not over $22,600 $658 plus 4.5% of excess over $16,450 Over $22,600 but not over $26,750 $ plus 5.25% of excess over $22,600 Over $26,750 but not over $41,150 $1, plus 5.9% of excess over $26,750 Over $41,150 but not over $154,350 $2, plus 6.45% of excess over $41,150 Over $154,350 but not over $308,750 $9, plus 6.65% of excess over $154,350 Over $308,750 but not over $2,058,550 $19, plus 6.85% of excess over $306,750 Over $2,058,550 $139, plus 8.82% of excess over $2,058,550 Single If New York Taxable Income is: The Tax is: Not over $8,200 4% of the New York taxable income Over $8,200 but not over $11,300 $328 plus 4.5% of excess over $8,200 Over $11,300 but not over $13,350 $ plus 5.25% of excess over $11,300 Over $13,350 but not over $20,550 $ plus 5.9% of excess over $13,350 Over $20,550 but not over $77,150 $ plus 6.45% of excess over $20,550 Over $77,150 but not over $205,850 $4, plus 6.65% of excess over $77,150 New York Personal Income Tax continued on next page Over $205,850 but not over $1,029,250 $13, plus 6.85% of excess over $205,850 Over $1,029,250 $69, plus 8.82% of excess over $1,029,250 4

8 Chapter 1 New Jersey and New York Tax Rates The dollar amounts in the schedules on the previous page, are for the 2013 tax year and are indexed by a cost of living adjustment. We suspect that the dollar amounts will vary slightly for the 2014 tax year. Unless new legislation is enacted for the tax years beginning after 2014, the tax tables will revert back to the tables used between , which means the top tax rate will be 6.85%. In addition, these tables will also be indexed for a cost of living adjustment. New York City Personal Income Tax New York City imposes a personal income tax on the city taxable income of every resident according to the following schedule: Married Filing Jointly If NYC Taxable Income Is: The Tax Is: $21,600 or less 2.907% of income $21,601 $45,000 $628 plus 3.534% of excess over $21,600 $45,001 $90,000 $1,455 plus 3.591% of excess over $45,000 $90,001 $500,000 $3,071 plus 3.648% of excess over $90,000 Over $500,000 $18,028 plus 3.876% of excess over $500,000 Single If NYC Taxable Income Is: The Tax Is: $12,000 or less 2.907% of income $12,001 $25,000 $349 plus 3.534% of excess over $12,000 $25,001 $50,000 $808 plus 3.591% of excess over $25,000 $50,000 $500,000 $1,706 plus 3.648% of excess over $50,000 Over $500,000 $18,122 plus 3.876% of excess over $500,000 Moving to Florida and becoming a Florida domiciliary could potentially eliminate these taxes because Florida has no state income tax. 5

9 Chapter 1 New Jersey and New York Tax Rates Estate and Inheritance Tax New Jersey and New York both impose estate taxes on their residents. Under New Jersey law, there is a state estate tax imposed on assets in excess of $675,000 passing to someone other than a spouse. Under New York law, there is a state estate tax imposed on assets in excess of $2,062,500 passing to someone other than a spouse. This means that if the value of your estate exceeds the respective state exclusion amount, the entire value of your estate is subject to state estate tax, not just the amount of your estate that exceeds the state exclusion amount. The estate tax rate schedule is as follows: New Jersey Estate Tax Rates Taxable Estate Tax $675,000 or less No tax $675,000 up to $727, % of the excess over $675,000 $727,174 up to $900,000 $19,304 plus 4.8% of excess over $727,174 $900,000 up to $1,100,000 $27,600 plus 5.6% of excess over $900,000 $1,100,000 up to $1,600,000 $38,800 plus 6.4% of excess over $1,100,000 $1,600,000 up to $2,100,000 $70,800 plus 7.2% of excess over $1,600,000 $2,100,000 up to $2,600,000 $106,800 plus 8.0% of excess over $2,100,000 $2,600,000 up to $3,100,000 $146,800 plus 8.8% of excess over $2,600,000 $3,100,000 up to $3,600,000 $190,800 plus 9.6% of excess over $3,100,000 $3,600,000 up to $4,100,000 $238,800 plus 10.4% of excess over $3,600,000 $4,100,000 up to $5,100,000 $290,800 plus 11.2% of excess over $4,100,000 $5,100,000 up to $6,100,000 $402,800 plus 12% of excess over $5,100,000 $6,100,000 up to $7,100,000 $522,800 plus 12.8% of excess over $6,100,000 $7,100,000 up to $8,100,000 $650,800 plus 13.6% of excess over $7,100,000 $8,100,000 up to $9,100,000 $786,800 plus 14.4% of excess over $8,100,000 $9,100,000 up to $10,100,000 $930,800 plus 15.2% of excess over $9,100,000 Over $10,100,000 $1,082,800 plus 16% of excess over $10,100,000 6

10 Chapter 1 New Jersey and New York Tax Rates As of April 1, 2014, New York has increased its estate tax exclusion from $1,000,000 to $2,062,500. This amount is set to increase each year until 2019, at which point the New York estate tax exclusion will equal the federal applicable exclusion amount, as adjusted for inflation. The scheduled increase each year is as follows: New York Estate Tax Exclusion Date of Death Exclusion Amount April 1, 2014 to May 31, 2015 $2,062,500 April 1, 2015 to May 31, 2016 $3,125,000 April 1, 2016 to May 31, 2017 $4,187,500 April 1, 2017 to Dec. 31, 2018 $5,250,000 January 1, 2019 and After $5,000,000 plus adjustment for inflation 7

11 Chapter 1 New Jersey and New York Tax Rates For decedents dying between April 1, 2014 and April 1, 2015 with an estate valued in excess of $2,062,500, the estate will be subject to estate tax at the following rates: New York Estate Tax Rates Taxable Estate Tax $2,062,500 or less No tax $2,062,501 up to $2,100,000 $104, plus 6.5% of excess over $2,062,500 $2,100,001 up to $2,600,000 $106,800 plus 8.0% of excess over $2,100,000 $2,600,001 up to $3,100,000 $146,800 plus 8.8% of excess over $2,600,000 $3,100,001 up to $3,600,000 $190,800 plus 9.6% of excess over $3,100,000 $3,600,001 up to $4,100,000 $238,800 plus 10.4% of excess over $3,600,000 $4,100,001 up to $5,100,000 $290,800 plus 11.2% of excess over $4,100,000 $5,100,001 up to $6,100,000 $402,800 plus 12% of excess over $5,100,000 $6,100,001 up to $7,100,000 $522,800 plus 12.8% of excess over $6,100,000 $7,100,001 up to $8,100,000 $650,800 plus 13.6% of excess over $7,100,000 $8,100,001 up to $9,100,000 $786,800 plus 14.4% of excess over $8,100,000 $9,100,001 up to $10,100,000 $930,800 plus 15.2% of excess over $9,100,000 Over $10,100,000 $1,082,800 plus 16% of excess over $10,100,000 New York law does not provide for a tax rate schedule after April 1, It is expected that the New York Legislature will use the current rates for a 1 year test period to determine whether New York should maintain the current rate schedule after April 1, It should be noted that New York s April 1, 2014 estate tax law changes include a complex estate tax calculation for estates with a value that is between 0% - 5% greater than the New York estate tax exclusion amount. The result of this calculation is a reduction of the New York estate tax due for those estates. For estates in excess of 5% of the New York estate tax exclusion amount, the entire value of the estate is subject to New York estate tax. 8

12 Chapter 1 New Jersey and New York Tax Rates Because the state estate tax thresholds are currently less than the federal applicable exclusion amount (the amount of assets one can pass to any beneficiary other than a spouse without triggering a federal estate tax), a New Jersey or New York estate tax could be triggered at the death of the first spouse if the first spouse took advantage of the full amount of the federal applicable exclusion available to him or her. For example, if a spouse dies with $5.34 million in 2014 and bequeaths all assets to a trust for his or her spouse and children using all of his or her applicable exclusion, no federal estate tax liability would be incurred (assuming that the deceased spouse had not used any of his or her applicable exclusion). However, a New Jersey or New York estate tax of approximately $431,600 would be imposed. New Jersey also imposes an inheritance tax on property transferred at death by resident decedents and on real or tangible personal property located in New Jersey and transferred by nonresidents. Transfers to the decedent s parents, grandparents, spouse, children and other issue are exempt. Transfers to brothers, sisters, sons-in-law, daughters-in-law, nieces, nephews, cousins, friends and all other beneficiaries (other than charities) are subject to inheritance tax according to the following schedule: Value of Share Class C Beneficiary Rate (brothers, sisters, brothers-in-law, sisters-in-law) Class D Beneficiary Rate (nieces, nephews, friends, and all other beneficiaries, other than charities) $25,000 or less No tax 15% $25,000 up to $700,000 11% of excess over $25,000 $3,750 plus 15% of excess over $25,000 $700,000 up to $1,100,000 $74,250 plus 11% of excess over $700,000 $105,000 plus 16% of excess over $700,000 $1,100,000 up to $1,400,000 $118,250 plus 13% of excess over $1,100,000 $169,000 plus 16% of excess over $1,100,000 $1,400,000 up to $1,700,000 $157,250 plus 14% of excess over $1,400,000 $217,000 plus 16% of excess over $1,400,000 Over $1,700,000 $199,250 plus 16% of excess over $1,700,000 $265,000 plus 16% of excess over $1,700,000 Florida has no estate or inheritance tax. 9

13 Chapter 2 Definition of Resident Taxpayer for Income Tax Purposes the Key Is Domicile Chapter 2 Definition of Resident Taxpayer for Income Tax Purposes the Key Is Domicile Where you live matters, especially when it comes to state-level income taxes. The differences between New Jersey and New York compared to Florida are significant and create planning opportunities for individuals who have connections to more than one state. This chapter will examine the tests employed in New Jersey and New York to determine who is a resident for income tax purposes. As discussed in Chapter 1, New Jersey and New York impose income taxes on a resident s income. In New Jersey, the rates for 2014 begin at 1.4% and reach 8.97% on income exceeding $500,000. In New York, the rates for 2014 begin at 4% and reach 8.82% on income exceeding $1,029,500 for single taxpayers and $2,058,550 for married taxpayers filing jointly. Florida imposes no individual tax on income, including capital gains. For example, an individual who sells stock in a business will pay state income tax on the gain if he or she is a New Jersey or New York resident, but will pay no state income tax on the gain if he or she is a Florida resident. Domicile and Statutory Residence It Is Not Just Six Months in Florida The tests for determining residency in both New Jersey and New York are the same. Both states equate residency with domicile. In this chapter, they will be used interchangeably. Domicile is a legal term of art. While residence simply requires physical presence in a state, domicile requires physical presence in the state and the intent to make that state your fixed or permanent home. It refers to any place you regard as your permanent home the place to which you intend to return after a period of absence (as on vacation, business assignment, educational leave, etc.). A person can have only one domicile, although he or she may have more than one place to live. Once established, your domicile continues until you move to a new location with the intent to establish your permanent home there and to abandon your original domicile. Moving to a new location, even for a long time, does not change your domicile if you intend to return to your original domicile. Thus, if you are domiciled in New Jersey or New York, you are a resident for income tax purposes, 10

14 Chapter 2 Definition of Resident Taxpayer for Income Tax Purposes the Key Is Domicile and all of your income, regardless of its source, will be taxable. There is an exception if an individual does not maintain a permanent home within the state and spends less than 30 days within the state, then he or she will not be deemed a resident for income tax purposes. The Key Test Even if you are successful in changing your domicile to Florida, if you return to New Jersey or New York for more than 183 days during the calendar year and maintain a home, you will be classified as a statutory resident under each state s tax law. Just like resident taxpayers, statutory residents are subject to state income tax on all of their income, regardless of its source. It is recommended that if you maintain a home in New Jersey or New York, but report that you are a nonresident for income tax purposes, you maintain a log of the dates that you are visiting the state in question. During an audit, you may be asked to produce records to show the specific days that you are in and/or out of the state. Auditors may request cell phone bills, credit card statements, bank statements, airline tickets and E-Z Pass records to confirm the number of days. Partial days count as full days for income tax purposes. For example, if you leave Florida for New Jersey on a Friday and arrive at 9:00 P.M. and return at 11:00 P.M. on Sunday, you are in New Jersey for a total of three days for tax purposes. Similarly, if you leave New York at 8:00 A.M. on a Friday to travel out of the state, and you return on Monday at 8:00 P.M., you are out of the state only two days for tax purposes, as only Saturday and Sunday count as days not in New York. Interestingly, certain medical and travel days do not count toward days spent in New Jersey or New York. Presence in the state will be disregarded if it is solely for boarding a plane, ship, train or bus for a destination outside the state. Similarly, time spent by a nonresident confined to a New Jersey or New York hospital or other medical facility for an illness generally does not count toward days spent within the state. For example, if you, as a Florida resident, fly to Newark Airport to board a plane to Europe, the time you spend in New Jersey does not count toward the 183 days. Likewise, if you have a medical emergency while in New York visiting your grandchildren, the time spent confined to a New York medical institution would not count toward the 183-day rule. Military service is also excluded. Maintaining a Permanent Residence The 183-day rule applies only if you maintain a permanent place of abode within the state for substantially all of the taxable year. A permanent place of abode is a residence that you permanently maintain whether you own it or not, and can include a residence owned or leased by your spouse. A place of abode is not permanent if you maintain it only during a temporary or limited period of time for a particular purpose. For example, suppose you are domiciled in Florida and 11

15 Chapter 2 Definition of Resident Taxpayer for Income Tax Purposes the Key Is Domicile are assigned to your employer s New Jersey office for a fixed and limited period, after which you return to Florida. If you take an apartment in New Jersey for this purpose, it will not be permanent. The permanent place of abode must also be maintained for substantially all of the taxable year (typically a period exceeding 11 months). Case Study: To illustrate, assume an affluent taxpayer is domiciled in Connecticut and maintains an apartment in New York City and a home in East Hampton. It is conceded that the taxpayer spent more than 183 days within New York. However, the taxpayer argued that both her New York City apartment and Hamptons home were under significant renovation and uninhabitable, thus she could not have maintained a permanent place of abode for the year in question. If the residences were actually under renovation, and as a result the taxpayer was unable to reside in either of the homes, then the taxpayer could not have maintained a permanent place of abode. In an interesting twist, however, photographs of the Hamptons residence surfaced in a popular magazine, revealing that the home was in fine condition, and the taxpayer lost the case. These facts are loosely based on a tax dispute between the New York Department of Finance and Martha Stewart. It should be noted that New York removed what was known as the temporary stay exception in its definition of a permanent place of abode. Under the exception, even if you were in New York for more than 183 days, but were there to accomplish a particular purpose, any home you maintained during that time would not be deemed to be permanent, and thus you would not be considered a New York statutory resident. The change in New York law means that all non-new York residents will be treated equally, regardless of their reason for being within New York. It is worth noting, however, that maintaining a permanent place of abode remains part of the definition. To illustrate, assume that there are two taxpayers, both of whom are nonresidents. The first taxpayer sublets an apartment on a temporary basis because he is assigned to his employer s New York office. The second taxpayer simply has a second home in New York. Under the new regulation, the fact that the first taxpayer is in New York only during a temporary or limited period would be irrelevant. Taxpayer one and taxpayer two would be treated equally, and the test is whether they maintained a permanent place of abode for substantially all of the year. New York s highest court, the Court of Appeals, recently ruled on a case that effectively narrows the definition of a permanent place of abode. The ruling provides that if a nonresident who is in New York for greater than 183 days purchases an investment rental property in New York, rents one of the apartments to his dependent parents, pays all of the rental costs for his parents, and stays with his parents on occasion to help care for them, but does not maintain a living quarters in the apartment, the nonresident will not be considered to maintain a permanent place of abode in New York. This case can be you used as guidance for those nonresident taxpayers who purchase apartments in New York City for their children or other family members, pay all the expenses associated with the apartment, but do not maintain separate living quarters in the apartment. Under such circumstances, the taxpayer should not be deemed to have a permanent place of abode and thus, should not be deemed to be a statutory resident of New York or New York City. 12

16 Chapter 2 Definition of Resident Taxpayer for Income Tax Purposes the Key Is Domicile Applying the Domicile Test If you are selected for audit, the burden of proof will be on you to show that you intended to change your domicile. Do not think your case is too small to avoid detection. New Jersey and New York devote substantial resources to their residency audit programs, and a number of reported decisions involve relatively small amounts of tax. Longtime residents who move to Florida should anticipate their first nonresident return (or failure to file a return after the move) to be closely scrutinized, especially if they have substantial federal taxable income. Auditors are generally looking to examine the following four types of nonresident taxpayers: 1. Taxpayers who have filed a nonresident return in the current year, but who have filed a resident return in a prior year. These taxpayers are more likely to be selected for domicile audits. 2 Taxpayers who have filed a nonresident return in the current year as well as in prior years, but who have been identified as having a permanent place of abode located within the state. Taxpayers identified in this way are more likely to be selected for domicile and statutory residence audits. 3. Taxpayers who have filed nonresident returns in the current year and in prior years and do not maintain a permanent place of abode within the state, but who allocate a portion of their income to New Jersey or New York. These taxpayers are more likely to be selected for income allocation audits. 4. Taxpayers who have not filed returns, who previously filed a resident or nonresident return, or who were identified as having some connection (business or personal) to the state in the current year. These taxpayers are more likely to be selected for either a domicile, statutory residency or income allocation audit. Thus, if you fit within one of the above categories, there is an audit risk. Consequently, it is important that you keep accurate records documenting your intent to permanently relocate to Florida and the number of days you subsequently spend in each state. If you receive correspondence from a taxing authority asking questions about your recent move, it is recommended that you consult with tax counsel before responding. The tests that state taxing authorities use in determining domicile are largely based on the taxpayer s specific facts and circumstances. There is no bright line test that adds any degree of certainty to the process. What the taxing authorities are really looking into is whether a person has shown a bona fide intention to change his or her domicile. For this purpose, your motive for changing domicile is immaterial (that is, it is acceptable that the primary reason for moving to Florida is for tax purposes). With domicile disputes, actions speak louder than words. A judge in one domicile dispute case said it best: General habit of life is more indicative of your intentions than formal declarations. A person s declarations are given due weight, but they will not be conclusive if contradicted by his or her conduct. 13

17 Chapter 2 Definition of Resident Taxpayer for Income Tax Purposes the Key Is Domicile This means that the authorities are looking for inconsistencies to see if you still maintain substantial ties to New Jersey or New York while claiming to have permanently relocated to Florida. A common question clients ask is whether they can still keep a residence in New Jersey or New York. The answer is that maintaining a second home should not by itself cause you to retain your New Jersey or New York domicile. It does, however, increase your chance of being audited and make it easier for the state to assert the argument that you have not permanently relocated. In fact, retaining a home in either New Jersey or New York is one of the primary factors state auditors will look at in determining whether the tax return you filed correctly reflects your resident status. The other primary factors that are part of the domicile analysis are: (1) active business involvement, (2) time spent at each location, (3) location of items near and dear to the heart, and (4) family connections. The significance of each of these factors will be discussed in turn. Maintaining a Home in New Jersey or New York Simply maintaining a second home in New Jersey or New York will not automatically classify you as a resident taxpayer. There have been several cases, actually litigated, where the taxpayers still maintained their New Jersey or New York residence and were taxable as nonresidents. What the taxing authorities look for is the individual s use and maintenance of the New Jersey or New York residence compared to the nature and use patterns of the Florida residence. Some people think that by selling the family home and renting a townhouse, condominium, apartment or home, they have escaped the domicile issue. Changing the form of your residence in New Jersey or New York may be helpful to show that you are taking steps to change domicile, but it is not dispositive of a change in domicile. The taxing authorities will examine the actions you engaged in to demonstrate your intent to abandon your formal domicile in other words, whether you still maintain strong and endearing ties to your former community. For example, a couple resides in a New Jersey community while raising their children and then sells their residence to purchase or rent a smaller residence in the same community after their children are grown. That new residence, regardless of the length of time spent there, takes on the full range of sentiment the couple has for the community in which they reside. When the couple moves to Florida, they will have to document their involvement in the new community and everything they have done to abandon their New Jersey residence in order to show that their ties to the Florida community are now stronger than those to New Jersey. With multiple residences, the size and value of the Florida home compared to the size and value of the New Jersey or New York home are also significant. Further, auditors will consider the nature of use of each residence (e.g., vacation home, rental property, etc.). Ideally, the Florida residence will be a larger, permanent home, whereas the New Jersey or New 14

18 Chapter 2 Definition of Resident Taxpayer for Income Tax Purposes the Key Is Domicile York residence will be a smaller vacation home, perhaps a shore house. If the value of your residence in New Jersey or New York is greater than that of your Florida residence, it may be merely because of the location of the property (e.g., a New York City apartment) and not due to the actual size of the property. If you are going to keep a residence in New Jersey or New York, you will want legitimate reasons for doing so. Typical situations are: (1) you do not want to sell the home because you want to avoid paying capital gains tax on the sale, (2) you are trying to sell the home but have been unable to because of a slow market (here you would want to show that you moved all of your personal belongings and valuables out of the house while you were trying to sell), or (3) you are able to maintain multiple dwellings (perhaps in other states besides New Jersey or New York as well). All of these reasons are legitimate and should be documented in case you are audited. The key is to use the Florida residence as your primary home rather than your vacation home and to be able to document this use as a pattern that outweighs the patterns established at your New Jersey or New York home. It is not necessary that you completely separate yourself from the emotional attachment to your home and community. Case Study: Taxpayer was born in Brooklyn, New York. After a divorce, he moved out of the home and leased an apartment in Manhattan. He eventually purchased a large townhome in Florida, but kept the Manhattan apartment because it provided an inexpensive alternative to obtaining hotel accommodations when he came to New York. Taxpayer was subsequently evicted from the apartment and purchased a Manhattan condominium for investment purposes. While in Florida, taxpayer filed a Florida declaration of domicile, registered to vote and actually voted in Florida, joined Florida social clubs and executed his will as a Florida domiciliary. The facts suggest that all other aspects of taxpayer s social life, other than his son (who lived in New York), were in Florida. The only ties the taxpayer kept with New York were the Manhattan condominium, several bank accounts and a passive interest in a New York business. Here the taxpayer has sufficiently demonstrated his intent to abandon his New York domicile. Case Study: Taxpayer had purchased a Florida home the previous year and moved there with the intent of making it his permanent residence. Even though the taxpayer retained his home in New Jersey, he made no claim for a New Jersey homestead rebate, voted in Florida, changed his driver s license and registered automobiles to Florida, filed a Florida declaration of domicile, filed Florida intangible tax returns, changed bank accounts and church memberships to Florida and spent 143 days in New Jersey during the year in question. Here the taxpayer sufficiently demonstrated his intent to abandon his New Jersey domicile. 15

19 Chapter 2 Definition of Resident Taxpayer for Income Tax Purposes the Key Is Domicile Case Study: Taxpayers, a husband and wife with six children, purchased a three-bedroom home in Boynton Beach, Florida, after the youngest child left home for college. Taxpayers first sold the family home in Buffalo, New York, and rented a furnished home in the area during the summer. Taxpayers later decided to build a new home in New York for the summer months. Taxpayers executed a Florida will, obtained Florida drivers licenses, registered to vote in Florida, were granted a Florida homestead exemption and began filing Florida intangible tax returns and New York nonresident income tax returns. Taxpayers had weak ties to their neighbors in New York and had developed substantial social ties to their neighbors in Florida. Taxpayers were audited and lost, primarily because of their presence in and substantial ties to the Buffalo area as a result of maintaining a second home there. This case illustrates the risk associated with maintaining a second home. The taxpayers here were unable to prove they had abandoned their New York domicile because they still remained actively involved in the Buffalo community, which was facilitated by the fact that they decided to build a large residence there after they moved to Florida. TIPS: As a taxpayer who retains a home in New Jersey or New York, it is important to: (1) take all affirmative steps to establish your new domicile, (2) not claim a homestead rebate for your New Jersey residence after moving (New Jersey only), and (3) keep records of days spent in each state. It is recommended that the residence in New Jersey or New York, to the extent possible, be smaller and require less maintenance. As discussed more fully below, be sure to move items near and dear such as furnishings, heirlooms or objects of sentimental value to the Florida home. Transferring the home to a revocable trust or limited liability company should be considered to avoid an ancillary probate proceeding. One could argue that a transfer to a limited liability company demonstrates an intention to not use the property as a principal residence. Note that a property held in a limited liability company may be treated as a separate taxpayer for federal tax purposes and is ineligible for the Internal Revenue Code Section 121 exclusion of gain on the sale of a principal residence, but a single-member limited liability company that is a disregarded entity for federal tax purposes can still qualify. Gifting fractional shares of the home or transferring the home to a qualified personal residence interest trust (QPRIT) and then paying rent when visiting may also be helpful options. REMEMBER: Keep the concepts of domicile and statutory residence separate. There are two separate tests auditors will use to determine if the resident status you filed under is accurate. As detailed above, when you maintain a second home in New Jersey or New York, there are two tests that you have the burden of satisfying in order to prove your nonresident status. First, you have to demonstrate that you are not domiciled in New Jersey or New York, and second, if you are not domiciled in New Jersey or New York, that you did not permanently maintain a home there and spend more than 183 days there. 16

20 Chapter 2 Definition of Resident Taxpayer for Income Tax Purposes the Key Is Domicile Business Activities You may find yourself subject to an income tax audit if you play an active role in the daily operations of a New Jersey or New York business and continue to maintain a degree of control over the business interests. However, it is not required that you give up all of your business interests. As you approach retirement and are financially secure, with proper business succession planning, you may start to devote less time to the business and bring in younger individuals who will eventually succeed you, reducing your status and compensation. Minimizing your involvement in the business to a passive/investment role will weigh in your favor if there is an audit. Case Study: Taxpayer was a doctor who resided in Brooklyn and was contemplating retiring and moving to Florida. He purchased a condominium in Boca Raton, filed a Florida declaration of domicile, registered to vote in Palm Beach County, obtained a Florida driver s license, registered his car in Florida, joined a Florida men s club and moved most of his bank accounts to Florida. When he moved to Florida, he gave the apartment on the second floor of his two-family home to his daughter and converted the remaining space to a temporary office for his use when he returned to New York. Taxpayer also had a summer home in Monticello, New York. When the taxpayer was in New York, he opened his office a few days a week to treat patients. Taxpayer was audited and deemed not to have changed his domicile. Case Study: Taxpayer formed a construction company, which became very successful, building 100 or more homes annually. Taxpayer and his wife purchased a home in a retirement community in Florida. At that time, taxpayer had an inactive role in the business and the business was running without taxpayer s active decision making. The tax authorities presented phone records detailing phone calls to taxpayer s New York office totaling eight hours per year. Taxpayer prevailed because he was able to prove that the phone calls did not amount to active business involvement and that he had chosen a hands-off, recreational/retired lifestyle in contrast to the working lifestyle he previously had in New York. Wages Of Nonresidents Even if you are deemed to be a Florida domiciliary, if you continue to perform services in Florida for a New Jersey or New York employer, or for your own business, this income may be taxable to New Jersey or New York if the move is determined to be for the convenience of the employer. This convenience-of-the-employer test provides that an allocation 17

21 Chapter 2 Definition of Resident Taxpayer for Income Tax Purposes the Key Is Domicile of compensation based on the days worked in New Jersey or New York turns on whether such days were worked outside of New Jersey or New York due to necessity of the service rather than for your own convenience. Any allowance claimed for days worked outside New Jersey and New York must be based upon the performance of services that of necessity, as distinguished from convenience, obligate the employee to out-of-state duties in the service of his employer. In making the allocation, no account is taken of nonworking days, including Saturdays, Sundays, holidays, days of absence because of illness or personal injury, vacation, or leave with or without pay. New York strictly enforces this rule, which was recently upheld against constitutional challenge by the highest court in the state, the New York Court of Appeals. For tax years beginning on or after January 1, 2006, it is the Tax Department s position that in the case of a taxpayer whose assigned or primary office is in New York, any normal workday spent at the home office will be treated as a day worked outside the state if the taxpayer s home office is a bona fide employer office. The Department has published detailed rules on what constitutes a bona fide office for purposes of applying the convenience of the employer test. New Jersey statutes and regulations do not specifically define the convenience of the employer test. However, in 2004, when specifically questioned, the Division of Taxation confirmed that it employs the convenience/necessity test as the method of allocating wages. As New Jersey tax rates continue to rise, it is possible that the Division will publish additional guidance on this issue and may become more aggressive in auditing taxpayers who work out of state for New Jersey-based companies. Even if New Jersey does not apply a convenience-of-the-employer test, a nonresident s wages may be subject to New Jersey income tax if earned, received, or acquired from sources within New Jersey by carrying on a trade or business in New Jersey. For example, a retiree divests his ownership interest in his former company and moves to Florida. Shortly thereafter, the taxpayer becomes a consultant for his former company and is paid a monthly consulting fee. If the taxpayer maintains a New Jersey office and travels to New Jersey to meet with the company s clients/customers, it is possible that the Division could take the position that the taxpayer is carrying on a trade or business in New Jersey. This in effect would have a result similar to an application of the convenience-of-the-employer test. Time Statutory Residency While spending 183 or fewer days in New Jersey or New York will prevent you from paying income tax as a statutory resident (assuming you are not domiciled in New Jersey or New York), the amount of time you actually spend in Florida is also important. It is desirable to make sure you actually spend more time in Florida than you do in New Jersey or New York. Many people think that as long as they do not spend 183 days in New Jersey or New York, it is not important how many days they spend in Florida. This is generally not accurate. 18

22 Chapter 2 Definition of Resident Taxpayer for Income Tax Purposes the Key Is Domicile For example, if you spend five months in New Jersey, but only three months in Florida, and the remaining four months either traveling or perhaps at home in a third jurisdiction, an auditor could argue that you never abandoned your domicile in New Jersey and merely use your Florida home as a vacation home. Case Study: Taxpayers, a husband and wife, followed a typical pattern. The husband became less active in his business, and after the children left the home, taxpayers purchased a home in Florida. They spent the following number of days in Florida: year 1 (116 days), year 2 (131 days), year 3 (156 days) and year 4 (140 days). While taxpayers never came close to failing the 183-day test, one of the primary reasons they lost their case was because they spent a lot of time elsewhere and could not prove they spent enough time in Florida. Items Near and Dear to the Heart It will be helpful in the audit process if you can demonstrate that you have moved sentimental items, such as family heirlooms, works of art, collections of books, stamps and coins, family photo albums and even pets, to Florida. Often these items will be valuable. Thus, you may have records from the freight company you hired to transport the items to Florida as well as insurance records to verify the location of these items. Of all the primary factors, this one is the easiest to control. If you are going to keep a home in New Jersey or New York, it is imperative, to the extent it is practicable, to move household furnishings, heirlooms or objects of sentimental value with you to the Florida home. Family Connections This is a very limited factor and includes only your spouse and minor children. A situation in which two spouses are maintaining separate domiciles will be discussed in Chapter 4. If you do have minor children and are filing as a nonresident, expect the taxing authorities to examine where the children are enrolled in school. Big Picture: Equal commitment to both states is not enough to effectuate a change of domicile. 19

23 Chapter 2 Definition of Resident Taxpayer for Income Tax Purposes the Key Is Domicile Secondary Factors Aside from the primary factors, there are a number of secondary factors that are also relevant in determining domicile. However, these factors are secondary for a reason: they are completely subject to your control. These secondary factors are subordinate to the primary factors and are to be considered only if, after weighing the primary factors, it is still unclear whether you have changed your domicile. At times, auditors will make their determination based only on the primary factors and never even look to the secondary factors. Nevertheless, since most people who are audited either have a second home in New Jersey or New York or have some sort of business involvement in a New Jersey or New York business, it is very important that these secondary factors, which are easier for you to control, are satisfied. They include the following: 1. The address at which you receive bank statements, bills, financial data and correspondence concerning other family business. 2. The physical location of the safe deposit boxes used for family records and valuables. 3. Location of auto, boat and airplane registrations as well as your personal driver s or operator s license. 4. Where you are registered to vote and an analysis of the exercise of the privilege. This includes your participation in primary or other off-season elections, including school board and budget elections. 5. In which state or states you file for homestead exemptions. 6. Country club memberships. While you cannot actually play golf during the winter months in New Jersey or New York, you should check to see if your club offers a seasonal membership. Such classification will only help. 7. An analysis of telephone, cable and utility services at each residence including the nature of the listing, the type of service features and the activity at the location. Many utility companies offer seasonal disconnects that can provide further documentation. 8. The citation in wills, trusts and other legal documents that a particular location is to be considered your place of domicile. 9. The active involvement in an organization, particularly where physical presence is involved. This includes the holding of office, regular attendance at meetings, and the volunteering of services which demonstrates an act of presence at the particular location. For example, John and Sarah were domiciled in New Jersey when John retired in They have a large home in New Jersey and a condominium in Florida. Prior to 2005, John and Sarah spent approximately four months in Florida 20

24 Chapter 2 Definition of Resident Taxpayer for Income Tax Purposes the Key Is Domicile and the remaining eight months in New Jersey. John was president of a corporation when he retired and was retained as a consultant and CEO of the corporate board after retirement. They have many family and friends in both the New Jersey and Florida areas, and are involved in the local country club and other civic and service organizations at both locations. When John retired in 2005, he and Sarah decided to spend more time in Florida, especially during the winter months. John and Sarah usually leave for Florida in the later part of October and return during the first part of April each year. During their first extended stay in Florida, they transferred their auto registrations to Florida and acquired new drivers licenses from Florida. They registered to vote in Florida and have voted there each year since retirement. They visit doctors and dentists in both locations as the need arises. They maintain bank accounts in both locations and have the mail sent to whichever location they are at. John and Sarah usually return to New Jersey for the Thanksgiving and Christmas holidays, and John returns about once a month to attend board meetings. In this illustration, John and Sarah took many secondary factor steps in an effort to effectuate a change of domicile, but did little to change the primary ties. In all likelihood, they would lose a domicile challenge in New Jersey. There are also activities deemed nonfactors, such as the location of certain charities to which you contribute as well as your religious organization membership. Membership or donations to such organizations, even if located in New Jersey or New York, does not equate to active participation. Nevertheless, it will only help your case if, upon moving to Florida, you join local religious organizations. The Year You Change Your Domicile Assume that taxpayers, a husband and wife domiciled in New York, are semiretired and rent a beachfront condominium in Florida. They spend January 1 to May 1 in Florida and May 1 to September 30 in New York. In the fall, they meet with their estate planning attorney and are advised of the steps necessary to effectively change their domicile to Florida. They move to Florida, with the intent of making Florida their domicile on October 1. Do they file resident or nonresident income tax returns? If you change your domicile to Florida in the middle of the year, in New York you need to file a part-year resident tax return. In New Jersey, you file both nonresident and resident tax returns for the appropriate periods, allocating income attributable to the source states. New Jersey (Part-Year Resident) When you change your domicile from New Jersey during the year, you are a resident of New Jersey for part of the year and a nonresident of New Jersey for part of the year. New Jersey does not have separate tax returns for part-year residents 21