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High earning New Yorkers take note: The importance of domicile

The new tax law has had a big impact on taxpayers throughout the country. This is particularly true for high-income earners in high tax states. These individuals are hit hard by a higher personal income tax bill.

As a result, high tax states like New York could lose out on some of their top taxpayers.

A tale of high-income earner tax woe: The state tax that can follow you wherever you go

A recent story in Forbes provides an excellent example of the burden that can come with a connection to a high tax state. The story involves a former football great: Keyshawn Johnson. As noted in the piece, Mr. Johnson was a native of another high tax state — California. California attempted to argue that although Mr. Johnson was in many states during his illustrious career, he always considered California his home state. As such, he was on the hook for over two million dollars in tax obligations.

The root of this issue is the concept of domicile. It is not uncommon for high income individuals to spend a large portion of the year in a lower tax or tax-free state to establish residence, or domicile, within that state for tax purposes. Whether this approach is successful will often hinge on the state’s definition of the term “domicile.”

States have taken varying approaches to the definition of the term domicile. New York generally defines the term as the place where the taxpayer has his or her permanent home and the place the individual intends to return after a vacation, business assignment, etc. California’s definition is similar. It considers California the domicile if the taxpayer has the intention of making the state his or her permanent home.

Mr. Johnson was more than just a genius on the field, he was also a pretty savvy businessman. Even though he spent most of his time in another state, evidence that Mr. Johnson had purchased homes and vehicles in California was used to support the contention that he was domiciled in California. Mr. Johnson countered with documents to establish the home was for his mother, the vehicles for other family members.

From CA to NY: Similar results possible

Since, as noted above, both states have a similar definition to the term domicile a similar fact pattern could lead to a similar result in New York. It is important to note that cases in California are not necessarily precedent in New York. It is wise to seek legal counsel to help determine the best way to craft your case if you find yourself facing a similar issue.

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