The Tax Cuts and Jobs Act of 2017 (TCJA) imposed a severely limited credit for individuals for state and local personal income taxes. Residents of New York State and New York City already faced a very high effective state and local income tax rate; many of them are now denied all but a tiny portion of their New York State and City personal income taxes. (The same legal tests for residence apply in both the State and City, but in this article, we will refer to them collectively as “New York.”)
To add insult to injury, New York applies an aggressive approach to proving statutory residency when a taxpayer has a primary residence outside the state or city. A decision this month from an Administrative Law Judge of the New York Division of Tax Appeals (Matter of Chew) is the most recent example. Mr. Chew (the “taxpayer”) was a successful investment manager (Lombard Odier Asset Management US Corp., previously BlackRock, Inc.) who worked out of a Manhattan office when he was not traveling. Mr. Chew filed a joint return with Mrs. Chew, who was a faculty member at Princeton University.
The Chews’ principal home was in Princeton. However, the Chews owned an apartment in lower Manhattan and spent time on weekends there. Briefly, in 2012 (the tax year under audit), New York determined a deficiency in personal income taxes because Mr. Chew was a “statutory resident” of New York. New York applied two legal tests to determine residency (and thus subject to worldwide personal income tax for that tax year). The first is “domicile” which is the state in which the individual’s “one true home” is located. This is a facts and circumstances test judging all of the factors in the individual’s life for that tax year. The facts did not support a determination of domicile, which in his case was New Jersey.
However, there is a second test, with two prongs. The first is that the taxpayer must have a permanent place of abode in New York. In a recent decision from New York’s highest court, Gaied, the taxpayer, lived in New Jersey and owned a service station on Staten Island. He had purchased a two-family residence on Staten Island in which his elderly disabled parents lived. On occasion, he slept over on a couch in the living room when it was too late for him to return to New Jersey. New York argued that the couch was a permanent place of abode, which with much hand wringing, the high court rejected.
The Chews maintained an apartment, which was clearly a permanent place of abode in New York, so that New York carried this first prong. The second prong is physical presence within the state of more than 183 days during the tax year, with certain exceptions (most relevant here, passing through New York on the way to the airport). This prong is proven by records of the taxpayer’s physical presence within and without New York. As the Chew decision makes clear, the evidentiary rules count against the taxpayer (that is, the taxpayer has the burden of disproving the arguments made by New York).
Mr. Chew argued that his records showed that he was not in New York for the tested period, but he came very close, even viewing the facts most favorably to him. The evidence included E-ZPass records, cell phone records and out-of-state travel records (which were extensive). The taxpayer lost, essentially because of a failure of proof. A busy international executive such as Mr. Chew had a difficult, and in this event unsuccessful, time trying to document his whereabouts on every day of 2012.
What Is the takeaway? First, New York has a long history of making residency arguments that do not appear to be based on Constitutional principles: how could Mr. Chew be a resident of two states simultaneously? Clearly, and New York did not contend otherwise, his domicile was New Jersey in 2012. The extension of New York’s reach to nondomiciliaries appears to be an unconstitutional taking. Be that so, other states, such as Connecticut, New Jersey, and California apply a similarly aggressive approach to “resident.” It is said, not entirely facetiously, that the New York revenue authorities have worked hard to drive people out of the state, particularly in favor of Florida.
New York is unlikely to change its rules, so taxpayers must react accordingly. An apartment such as the one the Chews maintained in Manhattan is a problem for any out-of-state residents that work in New York. It is easy to recommend that you book a hotel when staying over in Manhattan, but this can be unworkable.
Because of the TCJA’s limitations on state and local personal income taxes, the most efficient approach is to claim an income tax credit against the income taxes of your residence state. Of course, as the combined State/City effective tax rate is higher than the state of residence, the taxpayer will be paying more state and local income taxes than they can credit and far more that they case use in their federal return.