One of the many incidents of the COVID-19 outbreak has been that people are spending extended periods of time in locations they did not expect. We have heard countless stories of clients, friends and colleagues who plan to shelter in place at faraway family or vacation homes for most of 2020. For example, some New York City residents have sheltered in place outside the city in the Hamptons or upstate New York. Some California residents have fled to second homes in Nevada, an income tax-free state. Will these extended stays change an individual’s residency for income tax purposes? Will those who shelter in place in lower-tax jurisdictions be able to claim residency there for all or part of 2020? What about those who have fled to a higher-tax jurisdiction? Will their taxes go up?
There is a great disparity between state and city income rules and rates, with states like Florida, Nevada and Texas imposing no state or local income taxes and jurisdictions like California and New York City (combined with New York State’s rate) assessing their highest income tax rates at over 12%. Given this wide variance, it is no surprise that taxes weigh on some people’s minds as they consider where to shelter in place. Unfortunately, there has been little specific guidance on whether states and local taxing jurisdictions will tax you as a resident if you are stuck in their state or locale under shelter-in-place orders. Further, there is also little guidance on whether your home jurisdiction will acknowledge a change in residency if you spend a substantial part of 2020 in another location to shelter from the outbreak. Importantly, there has been no guidance from California or New York, two of the highest tax jurisdictions in the country, on these issues.
However, there is plenty of guidance on how changes in tax residency and domicile worked pre-COVID-19. While the rules vary based on applicable state or local law, residence is typically defined as the place where one intends to reside indefinitely or where one is located for other than a temporary or transitory purpose. Thus, temporary stays outside of your usual tax home should not change your residency. For most people, shelter-in-place stays likely qualify as the type of temporary stay that will not change tax residency. Even if you spend most of the year in a state like New York, that has a presumption of residence when one spends more than 183 days in-state, if your COVID-19 outbreak stay was temporary, then your days away from your home jurisdiction will likely be ignored, and you should remain a resident of your pre-COVID-19 home. Keep in mind that states are issuing new guidance weekly as the outbreak becomes a larger part of life in 2020; thus, it is always necessary to consult a tax attorney in order to determine how best to protect yourself from unexpected tax consequences. In addition, unsurprisingly, state taxing authorities frequently challenge positions that result in a significant loss of tax revenue. Thus, those spending most of the year in a different tax jurisdiction than is typical should keep detailed records to explain where they lived, for how long and why. They may also have to match up their records with state and local shelter-in-place orders or document a recommendation from their physician regarding best practices after shelter-in-place orders have been lifted.
Those that have made permanent moves during 2020 have picked quite an interesting time to change residency. Now more than ever, it is important to take the necessary steps to sever all connections to the prior jurisdiction and establish connections to the new jurisdiction. At a minimum, establish family, social, political and community connections in the new jurisdiction. Re-register all legal and medical records in your new state. List your home in the old jurisdiction for sale. Remove any homestead or homeowner’s exemption for property tax purposes.
What if the major difference in your daily life for 2020 is not your home base but your work location? A massive part of the workforce has been working remotely during the outbreak, which may also affect the tax strategies of an individual who is sheltering in place in a different state than he or she typically works. For example, if you live in New Jersey, and before COVID-19 commuted to New York City each day for work, do you now pay tax on your income to New Jersey instead of, as you did before COVID-19, to New York?
Those that are temporarily working from home in a different state than the state of their typical employment might conclude that their state income tax position will not change and that their income will continue to be taxed to the state where their job was previously located. Several states such as Indiana, Minnesota, Mississippi, New Jersey, Ohio and Pennsylvania have formally stated that any changes in employees’ temporary work locations due to the pandemic will not affect their tax filing positions. In other words, if you are temporarily working from home in New Jersey and worked in New York before the pandemic, you would still pay taxes on your income to New York because your income from your job is sourced to New York. If your job has permanently converted to a work-from-home arrangement in a state different than your prior job location, your tax reporting position is less clear. Whether you begin to file taxes in your home state or the state in which you used to work depends on a number of factors, including whether your employer withholds taxes in your home state, your employer’s other activities in your home state and the level of control and supervision imposed by your employer.
Tax residency during this unprecedented time is a nuanced, evolving area. If the pandemic continues for substantially longer, additional guidance from taxing authorities will likely be forthcoming. Your BBH wealth planner and relationship team would be happy to review current guidance in your jurisdiction and discuss your specific situation with you and your team of advisors.