Connecticut Residents Beware - Tax Implications of Your Ties to New YorkMarch 14, 2017
If you're a Connecticut resident, you can relate to the feeling that Connecticut is just a place between New York and Boston. We are often merely the link between our larger neighbors and there is no larger neighbor than New York. But, your ties to New York can have major implications for your income tax liability – specifically if you own or rent a second home in New York or if you "telecommute" to an office there. New York State and City (collectively referred to as "New York") may be able to claim that you owe taxes on the benefits you receive as a "New Yorker;" and you could be subject to as much as a 8.82% state tax and a city tax of 3.876%, for a grand total of as much as 12.7% in annual income tax (tax rates as of this writing). And this would be in addition to the tax you owe Connecticut.
Does this sound unfair? Unfortunately, it is perfectly legal for New York to levy taxes against you as a telecommuter or if you own or rent ("maintain") a home/apartment in their state. While the federal government limits a state's authority to tax, requiring that a "definite link, some minimum connection, between a state and a person, property or transaction it seeks to tax," states may "constitutionally tax nonresidents on their income from property owned or used within the state or from a business, trade or profession carried on in the state."
Some states, New York included, are more aggressive than others in seeking taxes from nonresidents and multi-state residents.
Modern technology and employee demands for flexible work environments have made telecommuting not only possible but also desirable for both employee and employer. The employee enjoys the benefit of greater flexibility and the ability to work out of their own environment, close to family. Employers often save money by way of paying less for electricity, office space and other employee amenities.
This modern convenience comes at a price, however. New York State has determined that telecommuters working at home for a New York-based employer may be subject to New York State taxes (although not New York City taxes) if the employee does not meet the convenience versus necessity test. The test is used to determine the reason for an employee telecommuting. If the employee telecommutes out of the employer's necessity, then the income from that employer attributable to the days the employee telecommuted is only taxable by the employee's resident state. However, if, the employee is found to be telecommuting for his or her own convenience, then the earnings are taxable by both the resident state and the state in which the employer is located, regardless of how many days the employee worked there.
New York State has stringently applied the convenience versus necessity test in their favor with concurrence of the courts. Focusing primarily on the nature of the work and not an employer's directive, New York has determined that if the work could have been performed in the New York office, even if the employer did not have office space available, then the employee does not meet the test. As the test has been formulated, it could apply to an employee who worked in New York for as little as one day out of a given year.
In one case, a New York-based employer, in an effort to reduce overhead, reduced its office space size but provided employees with the necessary equipment to perform their duties from home out of state. The employees were told by the employer to work from home four days per week and come into the office once a week. With office space inadequate, the employees were instructed to call ahead to reserve cubicle space. New York auditors determined that the work could have been performed in New York, even though the employer did not have adequate space, and that the nonresident employees owed New York taxes on 100% of their compensation.
In another case, a law professor at the Cardozo School of Law in New York appealed to the New York Tax Appeals Tribunal after the professor's claim for a refund of nonresident taxes was denied. A Connecticut resident, the professor worked about 3 days a week in the city and about 2 days a week at his home in Connecticut. He argued that New York should apportion taxes fairly based on physical presence. The judges upheld the earlier decision on the grounds that the employee did not meet the convenience versus necessity test. Furthermore, he enjoys a "host of tangible and intangible protections, benefits and values" due to his New York employment and, as such, 100% of his compensation should be subject to New York State and City taxes.
Both New York and Connecticut use the domicile and statutory resident methods in determining residency. As such, a person may be determined to be a resident of more than one state. Domicile is defined as the state which you have determined to be your permanent home, i.e., likely to be the state in which you are registered to vote, your children go to school, your vehicle is registered, you have a driver's license, receive credit card bills, your home and furnishings are equal to or better than those in another state and your favorite possessions (those near and dear) are located, among other criteria.
Residency can also be established using the "statutory resident" method which is determined using the number of days "spent" in a particular state. New York tax authorities will determine that you are a resident of New York if you spend 184 days or more out of a given year in the state and maintain a permanent place of abode in New York. Furthermore, any time spent in New York for any portion of a day, for any reason, will count as a day "spent" in New York.
For example, assume you are a commuter to New York City three times per week, on average, from your home in Fairfield County, for a total of 156 days. You also regularly drive into the city on weekends to attend theatre or sporting events, shop, meet friends for dinner and you own an apartment in the city at which you occasionally sleep. If the sum of all of those days totals 184 days or more, even if your time "spent" is just for a bite to eat or to run an errand, you are considered to be a New York statutory resident.
In general, if you maintain a permanent place of abode in New York, such as an apartment, and have a residential interest, you don't have to spend a single night in a calendar year in that apartment to be considered a statutory resident for that year. A permanent abode is available to you via ownership or rental. Apartments/homes that you own that are rented to tenants or a hotel room you use don't count as permanent abodes. A New York statutory resident is subject to New York State and City income tax as well as Connecticut's income tax. In contrast, if you are determined to be a nonresident of New York, you would only be subject to New York State tax - and only on "New York source income."
If you are a statutory resident, it's important to note that New York not only taxes the income earned from your employer located in New York City but all of your income (e.g., interest, dividends, capital gains, pension/IRA distributions, social security, etc.), regardless of its source.
The Risk of Audit
Tax authorities have determined that there may be a significant noncompliance problem with nonresidents and those with multi-state residency who either physically or virtually commute to New York. They have implemented an aggressive campaign to identify these taxpayers and collect monies owed to them. With a three-year look back for filers (unlimited look back for non-filers), New York may audit all of your records to determine your residency status. The burden is entirely on you, the taxpayer, to prove that you do not owe taxes as New York claims.
It is generally recommended that you maintain any documentation to prove that you were not in New York on a particular day, including the following types of records, in the event of an audit:
- Phone Bills (land line and cellular)
- Credit Card Statements
- Gas Receipts
- Toll Booth Receipts (e.g., E-Z Pass)
- Parking Receipts
- Train Tickets
Doesn't Connecticut Allow a Credit For Taxes Paid to New York?
Connecticut allows a credit for only your CT income tax rate (maximum rate of 6.99%) times the income earned for days a Connecticut resident actually physically worked in New York. If New York considers you a statutory resident or if you are a telecommuter who does not meet the convenience versus necessity test, the Connecticut credit would not be available to you with respect to additional income held taxable by New York, and you would have to pay taxes to both Connecticut and New York on much of your income.
Appealing to Connecticut or New York will most likely not produce a favorable result – there have been multiple court cases that back up New York's rights to collect income taxes from you, and Connecticut's law regarding credits for taxes paid to another state is actually quite clear (whether or not you would consider it to be fair). The best defense against a residency audit is to maintain any and all records that could prove that you did not spend the required 184 days of more in New York.
If you are a telecommuter to New York, keep a clear record of days actually physically worked in New York and establish the appropriate degree of employer necessity to work at home in advance. Given that New York narrowly defines necessity on a case by case basis, this may not provide you with any assurances against an audit.
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Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.