Avoiding State Income Tax on Part-Time Residents

Published Categorized as State & Local Tax
Avoiding State Income Tax On Part-time Residents, Houston Tax Attorney
Avoiding State Income Tax On Part-time Residents

Sometimes you can’t avoid paying state income taxes. This is true for those who have no ties to any state other than a state that has an income tax. But for those who have ties to multiple states, they can often structure their affairs to avoid the state income tax. This can be difficult to do for some states. The recent Edelman v. New York State Department of Taxation and Finance, 18-1570 (N.Y. Sup. 2019) case provides an opportunity to consider these rules.

New York Statutory Resident Scheme

New York may tax on those who live in one state but keep a part-time house in New York. This arrangement is typical for the majority of states that have an income tax.

According to the New York rules, those who have an abode (i.e., living quarters) in New York and who are physically in the state for 183 days or more are subject to income tax as a “statutory resident.” This means that they are taxed in New York on all of their income–even income earned outside of the state. To make these rules work, New York provides a tax credit for taxes paid to other states for income earned in the other states.

If the person is not a “statutory resident,” they can still be a resident of New York based on several factors for determining where the individual is domiciled. These factors attempt to identify domicile by considering which state the person has their closest economic ties to. Many states simply say this is where the individual his or her driver’s license. But the analysis is more complex than this and often has to be argued and substantiated on audit by the tax authorities.

An Example of Double Taxation?

This brings us to the Edelman case. In the Edelman case, the taxpayers were residents of Connecticut. They had an apartment in New York. They sold their business and paid tax to Connecticut. New York determined that they were statutory residents.

The question for the court, and then supreme court, was whether New York had the right to impose income tax on this out-of-state income. The question is an important one, as it could result in double-tax.

For example, consider the tax bill if the Edelmans had lived in a state that does not have an income tax, such as Texas or Florida. The Edelmans wouldn’t pay income tax to Texas or Florida, but presumably they would pay higher property taxes, sales taxes, gasoline taxes, etc. These are the mechanisms by which Texas and Florida raise tax revenue. But they would not be creditable in New York as taxes paid. So in effect, the Edelmans would be taxed twice–once by their residence state and once by New York.

Double tax could also arise if the business was formed and located in New York or if the business was real estate located in New York. In that case, the taxpayers might not be entitled to a tax credit in New York for the Connecticut taxes.

New York Statutory Residency is Constitutional

The New York supreme court sided with the state. It concluded that the New York statutory residency scheme is Constitutional. This was likely due to the tax credit New York offers for out-of-state income.

Had the Edelmans not been in the state for 183 days, they would have avoided this tax problem. This court case affirms the need for those who have homes in more than one state to know the rules and keep good records. It is often advisable to retain a state and local tax attorney to devise a plan to avoid unnecessary state income taxes.

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