In March and April, as restrictions began to intensify in response to the Covid-19 pandemic, many people relocated to a state other than their usual place of residence. Many assumed the relocation would be temporary and short-lived. This story reflects the lived realities of countless individuals who may have retreated to another state, either to what they had previously considered a “pied à terre” or to a family or childhood home. However, as we collectively surpass more than six months since the pandemic caused such drastic changes to everyday life, individual taxpayers who find themselves still in another state, perhaps with no precise end in sight, should consider the potential for their presence in a different state to lead to residency for personal income tax purposes. It is possible that two states could each assert taxing authority over an individual, with one state taxing based on principles of domicile and another state taxing based on principles of statutory residency.
Taxpayers who may have accidentally become subject to taxation by two states should consider the implications of any potential double taxation on wages and on unsourced income, including capital gains. These taxpayers will have to balance several competing considerations as they weigh the implications of double taxation with a tax regime that may be modified in 2021 and beyond, if a blue wave rises in the elections.
A prior article summarized the relevant tax laws in several northeastern states, where interstate movement is common: a. Connecticut, b. Massachusetts, c. New Jersey, d. New York, and e. Vermont. The prior article also explored the potential for taxation by multiple states and for part-year statutory residency. This article explores common fact patterns and the impact of certain variables that may affect outcomes.
I. Overview of Domicile and Statutory Residency
States tax their residents based on principles of domicile and of statutory residency. In broad terms, domicile is the state of one’s permanent home and the place one intends to return to after an absence. (TIR 95-7; GIT-6; 20 CRR-NY 105.20(d)) An individual can only have one domicile, and does not give up a domicile until they have established a domicile elsewhere. (Matter of Newcomb); GIT-6) Many factors determine a person’s domicile, and no single factor is conclusive. A statutory resident is generally someone who maintains a permanent place of abode in the state and is present in the state for more than 183 days during the taxable year. Within these various states’ definitions of statutory residency, it is crucial to understand how each state interprets “maintaining a permanent place of abode” and counts days. The prior article contains detailed summaries of the statutory residence laws of Connecticut, Massachusetts, New Jersey, New York, and Vermont. (Conn. Gen. Stat. Section 12-701(1)(B) (2018); Mass. Gen. Laws Chapter 62, Section 1(f); N.J. Rev. Stat. Section 54A:1-2(m)(2); N.Y. Tax Law Section 605(b)(1)(B); 32 Vt. Stat. Section 5811(11)(A)(ii))
II. Overview of Taxation in Multiple States
In the event an individual is considered taxable as a resident in two states, one state because of domicile and another state because of statutory residence, one or both states may allow the individual a tax credit for taxes paid to another state. States vary in the types of income and taxes that are eligible for such a credit.
Many states, including Massachusetts and New Jersey, will allow credits on income taxes paid to another state. The result from this general rule is that if taxpayers are subject to taxation in two states, one state because of domicile and another state because of statutory residency, those taxpayers will only be taxed once on their income, after the application of credits. Each state will tax the income that is sourced to that state. The state of domicile or both states may tax unsourced income but, as in New Jersey, a proportional credit will be provided to dual residents. As a result of these available credits, if a taxpayer is subject to taxation in two states, the only marginal cost to the taxpayer is the difference in tax rates between the two states.
There are exceptions to this general rule: Some states, including Connecticut, will only allow credits on income taxes paid to another state if the other state provides the same relief. Other states, including New York, do not allow credits on unsourced income taxed to another state. These exceptions have the effect of potentially subjecting unsourced income to taxation in two states.
Finally, states allow for part-year residency. Most states, including Connecticut and New Jersey, limit part-year returns to taxpayers that have changed their domicile during the tax year. Some states, including Massachusetts and Vermont, may allow statutory residents to file part-year returns based upon the time-period for which a taxpayer maintained a permanent place of abode.
III. Potential Impacts on Individual Taxpayers
As individual taxpayers consider their tax obligations for 2020, these complex residency rules will play a significant role. The following section applies these rules to situations that have become common during the Covid-19 pandemic. Although it has become common for states to enact temporary policies relating to corporate nexus and income sourcing, the states discussed in this article have not announced relief measures that would impact individual residency for tax purposes. Taxpayers should regularly monitor Covid-19 relief measures enacted in their states of domicile and potential statutory residency that may impact their status as a resident or provide them with additional relief in the form of tax credits or deductions for taxes paid to another state.
A determination of residency is highly fact-specific and will depend on each individual’s unique circumstances. Individual taxpayers should consult their tax professional concerning any particular situation and any specific legal questions relating to residency.
1. Ben, who typically lives in New York City, relocated to a home on Nantucket, Massachusetts that is fit for year-round use. He relocated to Nantucket in March 2020, and still remains there. (Previously, Ben had used his home for weekends and vacations in the late spring through early fall.) He intends to return to New York City in the future, and has continued to maintain his city residence where he left the majority of his possessions.
Under this fact pattern, Ben would be domiciled in New York, his usual place of residence. He would continue to be domiciled there, given that he does not intend to leave permanently, and therefore will be taxable in New York as a domiciled resident for 2020. With respect to Massachusetts statutory residency, it is apparent that Ben has spent more than 183 days in Massachusetts. Accordingly, Ben’s status as a resident of Massachusetts will turn on whether occupation of his home amounts to “maintaining a permanent place of abode” according to Massachusetts guidance. Based on these facts, the home would likely meet the physical requirements given that it is fit for year-round use (i.e. winterized and fitted with necessary residential facilities, such as a kitchen and bathroom). Additionally, Ben’s stay would not be considered temporary because the duration is not predetermined. Finally, although Massachusetts guidance on the meaning of “maintain” is scant, the DOR has suggested that “shar[ing] living expenses” with roommates and having access to the abode constitute maintaining a residence. (TIR 95-7) Therefore, assuming Ben either owns (thus paying any mortgage and real estate taxes) or leases the residence, pays other expenses of maintaining the home and has unlimited access to such residence, it is likely to be considered a permanent place of abode. Additionally, Ben would be considered a full Massachusetts resident given that he maintained this home prior to 2020.
If Ben is ultimately subject to taxation in New York (his state of domicile) and Massachusetts (his state of residence), he would be entitled to a credit against Massachusetts taxes for taxes paid to New York on any income that is not sourced to Massachusetts, along with any income that is derived from intangible personal property, such as investment income, so long as all of this income is actually taxed by New York.
2. What if instead of relocating to Nantucket, Ben maintained a home in and relocated to Litchfield, Connecticut?
As explained above, Ben would continue to be domiciled in New York, even with a protracted absence. In addition, Ben is likely to be considered a statutory resident of Connecticut based on these facts. First, Ben presumably will have been present in Connecticut for more than 183 days by Dec. 31, 2020. Second, because Ben’s presence in Connecticut is indefinite, the stay would not be considered “temporary.” Nor is there a suggestion that the residence is “a mere camp or cottage” only fit for vacation use, given that the home is fit for year-round use. Furthermore, since Ben owned the property prior to 2020, he will have maintained the residence for a full year. (Conn. Agencies Regs. Section 12-701(a)(1)-1(e))
Ben would receive a credit against Connecticut income taxes for taxes paid to New York only on income that was sourced to New York. If Ben had investment income, he would likely pay taxes on that income in both Connecticut and New York, and not be eligible for any credits. Connecticut will not allow Ben a credit for taxes paid on unsourced income because New York does not allow an analogous credit for Connecticut domiciliaries who pay Connecticut taxes on income from intangibles. New York does not provide residents with a credit for taxes paid to another state on unsourced income.
3. What if instead of relocating to Nantucket or Litchfield, Ben maintained a home in and relocated to the New Jersey shore?
As explained above, Ben would continue to be domiciled in New York, even with a protracted absence. In addition, by the end of the year, Ben presumably will have been present in New Jersey for more than 183 days. Therefore, the primary inquiry is whether Ben maintained a permanent place of abode in New Jersey during 2020. Given that Ben intends to remain in the home indefinitely, and possibly through winter, it is unlikely that the home would be considered to be used only for vacation purposes, although New Jersey has not offered significant guidance on this point. Depending on his actual job requirements and Covid-19-related government orders, Ben might be able to argue that his stay in New Jersey constitutes a temporary visit “to accomplish a specific purpose,” similar to a military assignment or temporary job assignment. (GIT-6) New Jersey does not require that a temporary stay be predetermined in length, unlike Massachusetts. However, New Jersey does not have much guidance as to what constitutes a temporary stay. Accordingly, based on these general facts, Ben may be taxable as a statutory resident of New Jersey and as a domiciliary of New York, unless Ben can successfully show that his stay was temporary.
As with the example above involving Nantucket, if Ben’s income was taxable in both states, Ben would be allowed a credit against his New Jersey tax liability for any taxes paid to New York on income that was not sourced to New Jersey (including unsourced income).
4. What if instead of relocating to his own secondary home, Ben relocated to his parents’ home in Nantucket?
While guidance on this point is scarce, the Massachusetts DOR has suggested that it is sufficient that a taxpayer shares living expenses with other inhabitants and has unfettered access to the property. (TIR 95-7) Thus, even if Ben did not pay rent or a mortgage, or otherwise have an ownership interest in the abode, it is possible he could be deemed to “maintain” the abode if he shares in living expenses such as utilities, phone or cable, and if he can freely access the residence during this time (e.g. it is not being rented out to an unrelated third party). If Ben’s parents pay for all household expenses, Ben may be able to argue successfully that he did not maintain the abode. However, if Ben helped with household chores for which his parents would otherwise have hired someone to perform (such as mowing the lawn, or shopping for groceries), then the Massachusetts DOR may consider this contribution enough to have maintained the abode.
Additionally, if Ben did not maintain a permanent abode in Massachusetts prior to 2020, Ben would be taxed as a part-year Massachusetts resident starting at the point at which he began to maintain the abode, provided that he was present in Massachusetts for more than 183 days in 2020. Thus, if his contribution to maintaining his parents’ home began only when he arrived in 2020, Ben may be able to avoid full year resident status in Massachusetts.
5. What if instead of relocating to a secondary home, Ben relocated to a series of rental units in Nantucket and Cape Cod?
A permanent place of abode includes a residence that an individual leases or occupies. There is no suggestion in the available Massachusetts guidance that a person’s use of multiple abodes would prevent them from becoming a statutory resident, although the DOR interprets a permanent place of abode to mean a place that is “continually maintained.” (TIR 95-7) In this case, Ben could argue that by moving from rental to rental, he did not continually maintain a residence. Additionally, if Ben did not maintain a permanent abode in Massachusetts prior to 2020, Ben would be taxed as a part-year Massachusetts resident starting at the point at which he began to maintain the abode, provided that he was present in Massachusetts for more than 183 days in 2020.
6. What if Ben relocated first to a short-term rental and then to a home that he purchased in April, as it became apparent that the Covid-19 emergency would not be a short-lived emergency?
Even if Ben’s short-term rental did not qualify as a permanent place of abode, his purchase of a home that he maintains for more than 183 days (assuming he retains ownership through the end of 2020), would generally be considered a permanent place of abode in most of the states discussed in this article. The result may be different where a home is purchased with less than 183 days left in the calendar year. (TB-55) Exceptions include Connecticut and New York, which require that the permanent place of abode have been maintained for the full year or eleven months, respectively.
7. What if Ben decided in July that his relocation to Nantucket would be permanent? Working remotely was going smoothly, his employer announced that remote work would be a permanent option and he loved the tranquility of the water.
- Scenario 1: Ben had been renting in New York, he ends his lease on his New York City apartment, and moves all of his possessions to his home in Nantucket.
- Scenario 2: Ben had owned an apartment in New York, he lists his apartment for sale in July, and stages the apartment by moving some—but not all—of his possessions to Nantucket. As of October 2020, his city apartment has not yet been sold, because there are many other city apartments also for sale.
In the event Ben decided to make a permanent move away from New York, he could endeavor to show that he has ended his domicile in New York in favor of the other state. In determining whether Ben has changed his domicile, New York will look to whether Ben intended to abandon New York and establish a permanent home in the other state. Ben must also actually reside in the other state. Each inquiry regarding change of domicile will be fact-intensive, and no single factor is determinative. Scenario 1 may provide stronger evidence that Ben abandoned his New York domicile in July, when he made the decision to remain in Nantucket. Scenario 2 is less clear, because he may still have been able to return easily to his New York apartment. Nevertheless, if Ben could show that the lingering furniture was purposefully staged to aid in selling the home, he may be able to rebut the notion that he was maintaining the apartment as his home. (Non-Resident Audit Guidelines Section 5)
8. What if Ben has no set time-frame for returning to the city, and plans on staying in the other state for the duration of the Covid-19 emergency, until he is able to receive a vaccine? Alternatively, what if he went to the other state with a plan to return to the city once his employer begins requiring in-person work?
In order to characterize his stay in Massachusetts as temporary, Ben must show that the length of time was predetermined and did not exceed one year. Examples provided by the DOR suggest that “predetermined” refers to a set period of time, rather than to an (uncertain) event that would mark the end of the stay. For instance, a college student who intended to leave Massachusetts after he graduated was still considered to maintain a permanent place of abode. Therefore, Ben’s plan to return to New York City once he receives a vaccine or is recalled by his employer may be too tenuous for the length of his stay to be “predetermined.” (TIR 95-7)
Both Connecticut and New Jersey allow for “temporary” stays, such as a job assignment or a vacation, that will not result in a permanent residence. Ben could argue that his stay in New Jersey due to Covid-19 constitutes a temporary visit “to accomplish a specific purpose,” similar to a military assignment or temporary job assignment. Given the lack of guidance, it is difficult to predict how Connecticut or New Jersey tax authorities might categorize Ben’s stay. (GIT-6)
Individuals who relocated for the Covid-19 emergency may be subject to taxation by two states, one based on principles of domicile and another based on principles of statutory residency. Generally, states consider taxpayers statutory residents if they maintain a permanent place of abode in the state and have spent more than 183 days in the state. However, each state has important nuances in the application of those general rules. The determination of domicile and residency is highly fact-specific, and will depend on each individual’s unique circumstances. Taxpayers should consult their tax professional concerning their particular situation and any specific legal questions relating to residency.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Lee Allison and Kat Saunders Gregor are partners and Andrew Yarrows is an associate at Ropes & Gary LLP.