Counting days is important to those who reside in more than one place that imposes taxes. In general, only people who live in more than one state have to worry, but when a locality imposes an income tax you also have to pay attention. A day here or there could change your tax bill by thousands of dollars.
States and localities tax based on residency. Stay more than half the year in a state and you will be taxed as a full-year resident. All of your income will be taxed by that state. A state where you live less than half the year treats you as a part-year resident. Generally, only income actually earned in that state is taxed by that state.
Estate and inheritance taxes also might be imposed based on residence. Real estate is subject to estate or inheritance taxes in the state where it is located. But personal property (non-real estate) is taxed by the state where the owner was a full-time resident.
States and localities are having money problems, so they are being more aggressive about monitoring the residence status of people and taxing those it considers full-time residents. New York and California probably are the most aggressive states on this issue.
A recent case from New York City is a good example of how these issues work.
Julian Robertson is a billionaire who used to run hedge funds. He worked in New York City (which has its own income tax) and owned a home there. But he also owned a home outside the city in Long Island. Robertson claimed his residence was in Long Island, not New York City and he did not owe the City’s income tax. The city disagreed. It argued that Robertson stayed in the city more than half the days and nights of the year, making him subject to its income tax. The amount at stake was over $26 million.
Robertson won the case because he and his staff had a sophisticated system for documenting where Robertson was each day and night. The case came down to four days, and a court decided Robertson was out of New York City those days and was not residing in the city over half the year.
Often in these cases, documentation is the key. If you spend substantial amounts of time in more than one location, you need to keep a log, diary, datebook, or other records proving where you spent each day and night.
There are other factors states look at to determine your residence. Official records that are examined include your driver’s license, voter registration, addresses listed on financial accounts, where mail is received, and where cars are registered. Some states will argue that if you own a residence there and it is available to you, you are resident there. This is particularly so when you once were a full-time resident in the state and try to establish residence in another state. You may need to sell or rent all property in the old state of residence to effectively change your residency.
You may not have $26 million at state, but you still need to prove where you spend more than half the year. Otherwise, the high-tax area could decide you owe taxes on all your income.
April 2010. RW
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