As our society becomes increasingly mobile and the economy causes taxpayers to work in multiple locations, it is important to understand the impact of state income taxation when you live and work in different states. Many retirees establish their state residency in Florida or one of the other states without state income taxes. Successfully managed, it keeps their non-earned income from being taxed at the state level.
If they maintain a permanent place of living in another state, they generally must spend more than half the calendar year in Florida or other such income tax free state to qualify as a tax resident of that state. To substantiate their time, accurate contemporaneous record keeping is mandatory to prove where you were on each day of the year.
For multi-state residents who have earned income, a more involved set of recording keeping may be necessary. We have successfully handled audits for two taxpayers whose residency has been challenged by the State of New York. The facts for both were that the husband worked full-time in New York City and maintained a permanent residence there in the form of an apartment. The wife and children resided in the southeast in the marital home. Since all of the husband’s salary was earned in New York, it was subject state income tax there. The issue for audit was whether it was subject to New York City income tax. Their rules state that if you are in the state for 184 or more days, you are subject to the additional city tax. On audit, you must submit clear and convincing information to prove the number of days you were out of the state each year. In doing so, you must deal with the New York rule that any time in the state counts for the whole day. Taken to its extreme, if you land at LaGuardia at 11:59 p.m. on Sunday night, the whole day counts as being in the state.
The types of records requested were calendars, credit card records, telephone records, travel records, cab and limousine receipts. If you find yourself in this situation, it is imperative that you keep a contemporaneous permanent file of all such information which supports your daily location during the year. In the last audit, where the taxpayer came very close to the 184 day line, the information which tipped the scales came from detailed cell phone records which showed his location while placing calls. New York had counted a date where his limo service showed it had picked up at his place of business in Manhattan for a regular weekly meeting at the corporate headquarters. What the record did not show was that the taxpayer did not attend the meeting that day because he was out of state on vacation. His cell records supported this and were accepted by the auditors which brought us under 184 days and resulted in a no change letter which avoided an additional tax of six figures.
If you are in this situation, assume you will be audited. Both of my clients who fit this scenario have been audited on this issue and one has been audited twice. Detailed record keeping saved them from substantial additional tax liabilities. Do not rely upon third parties to provide the needed records as they can be difficult to obtain. Keep your own records beginning with a detailed calendar along with any other documents which support your location. Be aware of the rules and manage your schedule accordingly.
For more information regarding this topic or other tax related concerns, please contact us at 404-255-7400 or send us an email.