Residency Tax: New York’s Non-Resident Determination

Comments and concerns over a recent decision by the New York State Tax Appeal Tribunal seem misplaced. In Re: John and Laura Barker, the Commissioners ruled that through a combination of (1) maintaining a  year-round beach house in Napeague, NY, and (2) one spouse worked in New York for over 183 days per year, the Connecticut-domiciled coupled was a “resident individual” as someone required to file state income taxes.


There seems to be confusion over the impact of this case — non-residents of New York already have to pay taxes on income they make in New York.


If the Barkers were found to be non-residents, as they unsuccessfully argued, Mr. Barker would still have to pay New York State income taxes, but only on the income he made in New York.


What this fight was all about and — and this isn't quite so obvious —  is that while non-New York residents only have to pay taxes on income made in New York State, New York residents have to pay taxes on income earned anywhere. In New York, in other states, in other countries, or, theoretically anywhere in the universe.


So to clarify, this case is really about New York State wanting to tax the Barkers on all their income from everywhere, even though the Barkers are not actually New York "residents" — they are domiciled in Connecticut. The Barkers claimed they should only be taxed on the husband's New York-derived income from his employment in Manhattan. New York state claims the Barkers must pay taxes on everything they make, from out-of-state to out-of-country income.


To ask it another way — does a non-resident of New York have to pay a residency tax which is a tax of all income they make any where? The short answer is yes, if that non-resident maintains a property in New York, because then New York state considered that non-resident to actually be a resident.


(Note: The non-New York income must be substantial in this case — we see an additional tax bill of up to $370,000.00 for one year. Certainly a fight worth taking)


Such a broad-based taxation scheme burdens their subjects with what is known as Universal Tax Jurisdiction and is, in my opinion, the overlooked story. I've talked before about how the Universal Tax Jurisdiction of the IRS put Americans at a disadvantage internationally and dilutes investment power. So too, the Universal Tax Jurisdiction of the states, put states' subjects on unequal footing.


Consider the cost of this vacation home to the Barkers. According to the the decision,  the ownership of this home sprung an unreported tax liability between approximately $110,000 and $370,000 more per year — for a house they paid $260,000 for. So clearly, because the ownership of the house is the determinative factor, the Barkers will likely sell it to avoid these additional taxes in the future. It is economically unfeasible for the Barkers to pay up to $370,00 per year for something worth $260,000.


Now, let us suppose that the Barker's sell the vacation home to their New Canaan neighbor, Mr. Right. Mr. Right works in Greenwich and only spends a few days in New York and will probably only spend the summer in his new beach house. Mr Right makes the same each as Mr. Barker, so what will his bill to New York State be?


The answer is $0.


So if you work in New York, even only half the year, your entire purchasing power can be greatly destroyed if you buy any property in New York, and here's a critical thing — even if it is a house you spend a few days at. As once New York State established "residency status" (even if you actually live in another state most of the time) Universal Tax Jurisdiction applies. Thus, New York State will tax you on everything you make anywhere in the universe.


Now two solutions I see:


If Mr. Barker's employer, Neuberger Berman, moves to Connecticut, then the issue in avoided entirely.


An (unresearched) possible work-around is this. Mr. Barker quick-claims the beach house to his wife. The couple then files separately. Mr. Barker need only file a non-resident IT-203 on his income he makes at Neuberger Berman. He neither owns nor maintains property in New York, thus he can not be classified as a resident. Because the "resident" classification never springs, all his non-New York investment income need not be reported or taxed to New York state.


Actually, it looks like since their parents were using the beach house nearly exclusively, the most likely and least eyebrow-raising solution would be for the Barkers to just quick-claim the property to their parents (if they haven't already) and they can still file jointly.


Is what New York State doing Constitutional? It seems like its got some problems with the Dormant Commerce Clause, but my guess is that courts will squint enough to find this power to tax.


Is what New York doing good? I think not. People and capital move. And while the eastern Long Island certainly has nice beaches, there's a lot of other places to find sand and water.


IRSMedic, the Law Offices of Parent & Parent, LLP helps people all over the world work through both state and IRS tax issues. 888-727-8796 or email info@irsmedic.com.