Moving out of California, even temporarily? Here’s what you need to know about taxes

Californians who worked part of this year in another state — to save money, be closer to family or for a change of scenery during the pandemic — may be in for a surprise next year when they file their taxes.

Depending on where they moved and how long they stayed, they may need to file a tax return, and possibly pay taxes, in both states. Although most states give their residents a credit for taxes paid to another state, the credit does not always make the taxpayer whole. And the rules are beyond perplexing.

“Right now, different states have different rules for when a nonresident working in that state” will be subject to income tax filing and withholding, said Eileen Sherr, a senior manager in tax policy with the American Institute of Certified Public Accountants. “The problem is, there are different thresholds that a lot of people aren’t aware of.”

Twenty-four states require employers to withhold taxes the first day a nonresident employee works in that state, or requires the nonresident employee to file a tax return if they’ve worked at least one day in the state, even if there’s no withholding, according to a map published by the Mobile Workforce Coalition, a business group pushing for interstate tax simplification.

“New York is notorious for staking out business conferences, looking for CEOs” who earn a lot in one day, said Jared Walczak, vice president of state projects with the Tax Foundation.

In other states, the threshold could be 15, 30, 60 or more days, or after the worker has earned a certain amount of money in that state. California requires nonresidents and part-year residents to file a tax return if they have a certain dollar amount of California-source income based on their age, filing status and dependents. (For details see FTB Publication 1031.)

Even if people don’t earn enough to owe taxes in a state where they are working temporarily, they may have to file a tax return in that state, especially if they want to recoup taxes withheld from their paycheck.

Business groups have been urging Congress for a decade to adopt a nationwide standard for the taxation of nonresidents, and exempt nonresidents working in a state for 30 days or less. They’re hoping the explosion in remote working during the pandemic will give it some urgency. A bill introduced by South Dakota Republican Sen. John Thune, S3995, would extend the exemption from 30 to 90 days for 2020 because of the public health emergency.

“In practice, even in normal years, compliance (with these rules) is not terribly high when we’re talking about a few days here or there,” Walczak said. “During the pandemic, when you have a diaspora of employees who have moved all over the country and employers may not even be aware because their home address has changed, it’s very unlikely that much withholding is taking place.”

Nevertheless, for workers on the move, it’s important to understand the rules.

California taxes its residents on all worldwide income, regardless of the source. This includes income earned while working in California and any other state, as well as investment and other income. If you are a California resident and work temporarily in another state, and the other state taxes your earnings, you may get a credit that offsets some or all of the taxes you owe California for the same income.

California taxes nonresidents on “California-source” income only. This includes income from services performed in California, rent or capital gains from real property located in California and income from a business or partnership based in California. (Merely owning stock in a publicly traded company based in California does not give rise to California-source income, unless you got the stock because you worked for the company, in which case it could.)

Determining the source of income for services performed in California is different if you are a nonresident employee or independent contractor. If you are a contractor, “the source of the income is determined by where the benefit of the service is received. When the benefit of the service is received in California,” it’s California-source income, said Franchise Tax board spokesperson Victoria Ramirez. It doesn’t matter where you were when you did the work.

If you are a nonresident employee, it depends on where you were when you performed the service, not where your employer is. If you performed the service in California, your income for those days is California-source income.

California previously taxed nonresidents on pensions they earned while working in California, but that ended after 1995.

If a California resident relocates permanently to another state, that person is considered a part-year resident. California taxes part-year residents on all worldwide income received while a California resident, and from California sources received while a nonresident.

Most states with an income tax follow this same general regime. So if you move from California to a new state, the new state generally will tax you on all worldwide income received while you were a resident of the new state. But you would still be liable for California tax on California-source income, such as rent on a home you left behind. (Seven states charge no personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.)

Determining who is a resident of which state is not always easy.

Most states presume you are a resident if you spend more than six months in that state (which does not have to be consecutive). If you are living in two places. it’s important to keep a log of where you have spent each day.

California has no such “bright line test,” Ramirez said. FTB Publication 1031 states, “You will be presumed to be a California resident for any taxable year in which you spend more than nine months in this state.” However, “there is no presumption of nonresidency,” Ramirez said.

In other words, spending more than six months or even nine months outside of California does not automatically make you a non-resident.

“The underlying theory of residency is that you are a resident of the place where you have the closest connections,” the FTB says. It looks at a multitude of factors including the amount of time you spend inside and outside of California, where your spouse and children live, the location of your principal residence, the state where your driver’s license is issued, where your vehicles are registered, where you maintain your professional licenses and voter registration, and where your bank, health care providers, accountants and attorneys are. The state considers not just the number of ties, but also their strength.

The Franchise Tax Board is famous for pursuing people who have moved out of state if they have significant California-source income.

“If you think you can move to another state and still have ties to California,” you are “likely to face an audit. Don’t go into that lightly,” said Clay Stevens, a tax lawyer with the wealth management firm Aspiriant.

Establishing residency in another state is not always easy.

Brendan Foley and his girlfriend moved in April from San Francisco to Boulder, Colo., because it had a lower cost of living and less traffic but a similar culture. He has always worked remotely for a French electric company. His girlfriend, who works for a major Bay Area tech company, is working from her new home until its Boulder office reopens.

The couple spent their first two months in an Airbnb, while they were looking to buy a house. “The first month we were not able to establish residency” in Colorado because they had no permanent address, Foley said. So they kept their residency in California, even though they were working and having taxes withheld in Colorado. “It was this weird limbo, we didn’t know what to do,” he said.

Once they closed on a home in Boulder, they were able to get a Colorado driver’s license and mail with their name on it, open a bank account and establish residency in Colorado.


Here’s How Moving to Work Remotely Could Affect Your Taxes

The rules are complicated and vary by state, so accountants are advising taxpayers to keep track of how many days they spend working in each state.

By 

If you decided to ride out the pandemic at your out-of-state vacation house or with your parents in the suburbs, you may be in for an unpleasant reality: a hefty tax bill.

Given the complexity of state tax laws, accountants are advising their clients to track the number of days they spend working out of state. Some states impose income tax on people who work there for as little as a single day.

Even before the pandemic, conflicting state tax rules were creating issues for the increasing number of people who were working remotely, said Edward Zelinsky, a tax professor at Yeshiva University’s Cardozo School of Law.

“In the last six months, this has gone from a big problem to a humongous problem,” Mr. Zelinsky said. He knows from personal experience: He lives in Connecticut but works in New York and has paid tax on his New York-based salary to both states.

You might, depending on the state and how long you have been there.

The state where you have your primary residence typically can tax your worldwide income, and any state where you earn income also has the right to tax you on the income you earn in that state, said Kirk Stark, a professor of tax law at the University of California, Los Angeles.

“That immediately creates a possibility of two separate states taxing the same income,” Mr. Stark said.

Many states offer credits for taxes paid to other states, and that may ease the burden. But if the state where you have relocated does not have a reciprocity agreement with the state of your primary residence, you could be subject to double state-income taxation.

You have less to worry about if you have relocated to one of these 13 states, which have agreed not to tax workers who have moved there temporarily because of the pandemic: Alabama, Georgia, Illinois, Indiana, Massachusetts, Maryland, Minnesota, Mississippi, Nebraska, New Jersey, Pennsylvania, Rhode Island and South Carolina, according to the Association of International Certified Professional Accountants.

Unfortunately not, unless you are prepared to move there permanently.

Navneet Garodia, 35, a financial services professional, has an apartment in Jersey City, N.J., but moved in July to his in-laws’ house in Florida so that he and his family could have more space. He plans to reduce his New Jersey tax payments to account for the days he has worked from Florida, a state that does not impose income tax on residents.

“I shouldn’t be paying the amount of taxes I am in New Jersey, and Florida has no taxes,” he said. He has taken steps to show tax authorities that he is, in fact, in Florida, such as forwarding his mail to his address there.

But Mark S. Klein, the chairman of the law firm Hodgson Russ, says it is not that simple, as long as taxpayers still have a primary residence in the state where they had been working and intend to return there. The same applies for people who have moved to the Hamptons for the last few months — they will not be exempt from New York City tax if they return to the city once the pandemic is over.

“The rule with changing your domicile is you have to leave New York City, land in a new location and stick the landing,” Mr. Klein said.

Yes. Mr. Klein said more than 50 of his clients had moved to Florida, Texas, Nevada or Wyoming since March.

“It’s not a coincidence that these are no-tax states,” he said. The other states with no income tax are Alaska, South Dakota and Washington. Many of his clients have kept their residences in California or New York, he said, but will plan to spend the majority of the year in their homes in lower-tax or no-tax states.

Kent and Ruby Santin, who had lived in Long Island City, Queens, said they were looking to buy in New York when the pandemic hit. Instead, seeking better access to the outdoors, they changed course and bought a house on Lake Tahoe in Nevada.

The lack of income tax there was also a big plus. “That was part of the decision, to be totally honest,” Mr. Santin, 30, a management consultant said.

“Federalism,” Mr. Zelinsky said. Under the U.S. Constitution, states are permitted to create their own tax rules.

“What we’ve learned in the last six months are the benefits and the disadvantages of federalism,” he said. The benefits include governors who acted responsibly in managing the pandemic who “can make up for deficiencies of the federal government,” he said.

“The disadvantages are that states are going to have 50 different tax rules.”

Auditors are persistent, especially in New York. They will want to know how many days you have been in a state and will check your phone records, your credit card receipts, your voter registration, your travel records and details indicating how permanent your second residence is, including where your children are enrolled in school.

Even the nurses who came to New York to treat coronavirus patients will be subject to New York income tax if they worked in the state for more than 14 days, Gov. Andrew M. Cuomo said in May.

“We’re not in a position to provide any more subsidies right now because we have a $13 billion deficit,” Mr. Cuomo said at a news conference.

Nishant Mittal, the general manager of Topia Compass, which offers an app to help people keep track of their whereabouts for tax purposes, said he saw a 513 percent rise in subscribers in June, compared with June last year.

He said most of his clients did not envision a situation in which they would be working from the office as much as they did before the pandemic. “At this point, it’s no secret that this is going to be a big headache,” he said.

 


Coronavirus Telecommuters could face a Tax Nightmare

BY JEFF JOHN ROBERTS in Fortune.com on June 27, 2020 7:00 AM CDT

As the COVID-19 outbreak battered Brooklyn in March, Beth and Ryan Carey decided to flee. The two educators and their toddler, Finn, drove nine hours south to stay with family in North Carolina. They have yet to return. Like many others who left New York during pandemic, the Careys have discovered numerous upsides to leaving the city: a lower cost of living, ample space for Finn and their hound dog, Cash Money, to roam, a more leisurely pace of life. And since both can do their job remotely, the couple are tempted to leave the stresses of New York life behind for good.

But just because they may be ready to part ways with New York doesn’t mean the state is ready to part ways with them.

What is the ‘convenience rule’?

As it turns out, moving to another state—even one 500 miles away—doesn’t mean workers can escape the clutch of New York’s powerful tax collectors. The reason is a controversial tax policy, known as the “convenience rule,” which deems that those who work for a New York company are earning wages in the state even if they are telecommuting. In the view of the Albany tax gnomes, a move to North Carolina, like the one made by the Careys, is one of convenience, not necessity. And that means, for tax purposes, they are are still working in New York.

A handful of other states—Pennsylvania, Delaware, and Nebraska have formal convenience rules of their own—but tax lawyers say those states don't enforce the rules with nearly the same vigor as the Empire State.

“New York has always had an aggressive tax department,” says Elizabeth Pascal, an attorney with Hodgson Russ, adding the state uses sophisticated auditing software in its hunt for revenue.

The upshot is that many middle-class workers who are contemplating permanent post-COVID relocations could face tax headaches more familiar to affluent earners like hedge fund managers and professional athletes. And many could face the prospect of double taxation.

Edward Zelinsky, a professor at Cardozo Law School, knows this firsthand. The Connecticut resident has battled New York in court for years, saying he is willing to pay tax on the days he is physically present to teach, but that he should not have to pay income tax on the days he works from home. His legal challenges have come up short in New York’s courts, however, meaning Zelinsky has had to pay income tax in two states.

Tax credits for commuters


Zelinsky and other telecommuters caught a break two years ago when Connecticut changed its tax policy to let its residents who paid New York income tax obtain an offsetting credit. But the credit does not entirely reduce the burden since New York tax rates are higher than those in Connecticut.

Meanwhile, most other states do not provide any credit to resident telecommuters who pay under New York’s long-arm tax rules. The reason, says Zelinsky, is that those states don’t believe the New York policy is legitimate. (Unsurprisingly, Zelinsky agrees with this position, arguing New York’s convenience rule violates the Constitution).

In an ideal world, Congress or the 50 states themselves would devise a compact to prevent double taxation and to clarify how telecommuters should be taxed. And indeed, there are pockets of such cooperation—notably in the form of reciprocity agreements among the District of Columbia and neighboring states, and between Illinois and its neighbors.

The broader reality, though, is that many of those who telecommute across state lines will face conflict and confusion. And the situation is likely to get worse as states react to the economic shocks created by COVID-19.

The State of Arkansas, for instance, created a buzz among tax lawyers this May after it issued a legal opinion saying that a computer programmer in Washington State should pay income tax to Little Rock for work done for an Arkansas entity.

As these situations become more common, the nation’s growing telecommuter workforce will face hard choices in the coming tax year.

Exceptions and enforcement of the convenience rule
While New York is aggressive about enforcing its convenience rule, there are three ways to escape it. The clearest exemption is for those employees who transfer to a company’s out-of-state office: A New Yorker who moves to her firm’s satellite office in Boston need only pay taxes to Massachusetts.

In the case of an out-of-state employee working from a home office, though, it’s not so easy to escape New York’s clutches, says tax lawyer Pascal. In order to qualify for an exemption, she says, the worker must be performing a task at the employer’s behest that could only be done out of state. For instance, the employee might require proximity to a special laboratory or factory that doesn’t exist in New York.

The third way to avoid New York’s convenience rule is for telecommuters to avoid setting foot in the state—though there is some debate about what this entails. Pascal says an employee can safely go to New York for a vacation so long as the trip doesn’t have work purposes, but a recent bulletin from Ernst & Young suggests that spending even “one day” a year in the state could trigger the rule.

Zelinsky, meanwhile, says he used to tell people they could go New York for non-work purposes, but that he believes tax authorities will no longer grant such latitude.

Fortune sought clarity from New York’s Department of Taxation and Finance about how and when the convenience rule applies, but did not receive a response.

Some other states, meanwhile, have issued guidance to say they won’t tax those who are working remotely in their states as a result of the coronavirus. But many others have not, and given the dire fiscal situations many states are finding themselves in, it’s unlikely tax authorities will be in a forbearing mood next year.

New York, in particular, could become still more aggressive in seeking income tax revenue. Several tax lawyers have noted the state offered little relief to those who had to relocate in the wake of Hurricane Sandy in 2012. And Zelinsky points out the state has even refused to provide tax exemptions for medical workers who came to the state to assist with the COVID-19 emergency—including many nurses from Tennessee, where there is no income tax at all.

Some middle-class telecommuters may wonder if they can avoid out-of-state tax headaches by simply declaring income in their resident state, and hoping for the best. Tom Corrie, a tax lawyer at Friedman LLP, says that New York has historically targeted high-income individuals for audits, rather than those making $50,000 a year.

But a modest income is no guarantee, of course, that an out-of-state telecommuter will escape an audit by New York tax authorities. This is especially the case given that the state, according to Corrie, is facing a drastic shortfall in sales-tax revenue as a result of the pandemic.

“The state is extremely hungry for money,” he says.


Can Trump Avoid Taxes by Leaving New York? It’s Not So Simple.

The state has a platoon of auditors who zealously examine whether people are trying to skirt taxes by improperly claiming that they live elsewhere.

By  in the New York Times on

Like a long line of other wealthy New Yorkers, President Trump has decided to establish his legal residence in Florida, apparently at least in part to save money on his taxes.

But changing one’s legal home is not so simple.

New York State has a platoon of state auditors who zealously examine whether people are trying to skirt paying its state and local taxes by improperly claiming that they live elsewhere.

Those officials regularly face off against an industry of accountants and lawyers who specialize in tax avoidance strategies.

Under state law, taxpayers who spend 184 days a year in New York — more than half the year — have to pay state taxes on all of their income. But even if a person does spend most of the year out of state, that is not enough.

Tax experts say that convincing auditors that a taxpayer has gone from being a New Yorker to being a Floridian involves more than filing a “declaration of domicile” form, as Mr. Trump and Melania Trump, the first lady, did in Palm Beach County Circuit Court in September.

Florida is one of the few states with no state or local income taxes and has long been a preferred destination for wealthy New Yorkers looking to lower their tax bills. But Mark S. Klein, the chairman of the law firm Hodgson Russ, said New York “made it very clear at least a dozen years ago that filling out pieces of paper does not change your domicile.”

New York has a multipart test that takes in everything from where a taxpayer’s family is to where he or she keeps “items near and dear,” like family heirlooms. Auditors also examine whether a taxpayer continues to maintain a business in New York.

In this case, if Mr. Trump still controlled the Trump Organization, with its considerable holdings in New York City, that might raise questions.

In other words, tax officials look at more than whether a taxpayer has simply switched from a New York bank to a Florida bank.

It is not clear how much time Mr. Trump plans to spend in New York during the rest of his presidency or after he leaves the White House — or whether he plans to keep his triplex apartment in Trump Tower or sell it, a move that could figure in how New York evaluates his tax status.

And the burden of proof would be on him.

“Unlike the current impeachment hearings, where the burden of proof is on the House of Representatives, here the burden of proof is on the president to prove that he is no longer a New York resident,” said Michael Kosnitzky, who chairs the private wealth group at the law firm Pillsbury Winthrop Shaw Pittman. “The burden is squarely on him.”

There are seemingly reams of rules and endless ways in which taxpayers can be tripped up.

Nishant Mittal, a co-founder of Monaeo, which offers an app to help wealthy people keep track of their whereabouts for tax purposes, said New York had conducted an average of 3,024 nonresidency audits a year between 2010 and 2017. He said the audits had yielded about $1 billion for the state.

Barry H. Horowitz, a state and local tax partner in the accounting firm of Withum, said New York had been aggressive about auditing taxpayers who left the state — or claimed, for tax purposes, that they had.

“New York’s going to fight you 100 percent on this,” Mr. Horowitz said. “They audit basically 100 percent of the returns for change of residence. Of every client I’ve handled who changed residency, they’ve all been audited.” He said he had dealt with “800-plus audits.”

One issue that the tax authorities consider is “have you abandoned your New York residence?” Mr. Kosnitzky said.

But the state considers more than whether abandoning a New York residence means giving up a brick-and-mortar house, like Mr. Trump’s home on the 58th floor of Trump Tower.

“The term they use is where you have established strong and enduring ties,” Mr. Kosnitzky said. “He’s associated with New York. He’s Mr. New York. It’s hard for Mr. New York to disavow his residency. It’s not insurmountable, but he’s associated with New York.”

Another factor that could help Mr. Trump prove his case is whether a taxpayer who has a business has been running that business in the tax year in question.

Mr. Trump “could be found to be a Florida resident because he’s not technically running the company anymore,” said Robin Statsky, an accountant in Manhattan. “He’s basically been in Washington” more than he has been anywhere else since he was inaugurated.

Tax experts say Mr. Trump is not alone in leaving. There has been a surge of departures among hedge fund managers looking to slash their tax bills, especially after they lost the deduction for state and local taxes in the 2017 tax overhaul.

The elimination of that deduction had a significant impact among well-off residents in New York and New Jersey, states with some of the country’s highest local income tax rates.

By some estimates, leaving could reduce their tax bills by nearly 13 percentage points. One New York financial executive who relocated to Florida said his tax savings amounted to between $100,000 and $200,000 on income of between $2 million and $3 million.

This executive, who spoke on condition of anonymity because his firm does not allow employees to speak to reporters, said that saving on taxes was not the only reason he moved. But he said the decision to leave New York “was substantially influenced by not having to pay New York for something I don’t feel I’m getting much value for.”

The exodus of people like him has created business for lawyers like Mr. Klein of Hodgson Russ.

“Most of my practice these days is representing high-net-worth, high-income individuals who are getting out of Dodge,” he said, referring to New York. “I probably counsel four or five people a week on how to establish their domicile in — not necessarily Florida, because a lot of people are moving to Wyoming or Nevada, to low- or no-tax states.”

If New York does challenge a residency, the chances that a taxpayer will win are not good, said Mr. Mittal of Monaeo.

“The reason is, New York is pulling data from cellphone carriers” and other sources like social media sites, he said. “When the state comes in and says, ‘You were not in New York,’ it’s really, really hard to fight it.”

Mr. Klein said the firm had hired three paralegals who used to be auditors in New York City. One now does what he called “prophylactic audits,” reviewing clients’ cases and “telling us what her recommendation would have been to her supervisors had she still been an auditor.”

That Mr. Trump would walk away from New York might seem hard to imagine. It was the city where he was born, where he built towers that carried his name and where his blustering personality and his romantic life — he is twice divorced — made him a fixture in the tabloids.

It was also where he starred in “The Apprentice,” the reality-television show that elevated his national profile.

But since he was elected president, it has seemed that the city and Mr. Trump were headed for a breakup. In discussing his decision to leave New York on Twitter, Mr. Trump said he had been treated poorly by political leaders in the state, despite having paid “millions of dollars in city, state and local taxes each year.’’

But because Mr. Trump has never released his taxes, the validity of his claim cannot be determined.

Mr. Trump is also said to be angered by a subpoena filed by Cyrus R. Vance Jr., the Manhattan district attorney, seeking his income tax returns, though changing his residence is not likely to affect the case.

Gov. Andrew M. Cuomo — who on Thursday tweeted “Good riddance” about Mr. Trump’s change of residence — speculated at an unrelated news conference on Friday that the president had moved for “legal purposes,” seemingly referring to the case being pursued by Mr. Vance, rather than because of New York’s high taxes.

“He’s resisting releasing his taxes. He’s in litigation. I think his lawyers think this will help his legal case,” Mr. Cuomo said, though he acknowledged he did not know that to be true.

Mr. Trump responded with a series of tweets that began and ended with “I love New York.”

“New York can never be great again under the current leadership,” he wrote, naming Mr. Cuomo and Mayor Bill DeBlasio. “Cuomo has weaponized the prosecutors to do his dirty work (and to keep him out of jams), a reason some don’t want to be” in New York, and “another reason they are leaving.”