The Tax Cuts and Jobs Act (TCJA) has led to many changes in tax law. We are just starting to experience the full impact of these changes, as many of the new provisions went into effect for the recent tax filing for the 2018 tax year. One specific impact tax experts predict to continue to grow in coming months is an uptick in state tax audits due to a cap on the state and local taxes (SALT) deduction.
The TCJA now limits the SALT deduction to $5,000 for those filing returns as single individuals and $10,000 for married couples. This limitation has a significant impact on states with high tax rates — namely New York and California.
How could this change lead to increased audits by state agencies?
State agencies are concerned about residents relocating to lower tax states. Although a completely legal tax savings strategy, taxpayers must follow proper protocol. In high tax states, like New York, the state agency can tax an individual’s income if that individual is domiciled or a statutory resident. A domicile is the state of the taxpayer’s permanent home and where the taxpayer “intends to return whenever absent.”
New Yorkers looking to establish domicile in another state can benefit from a basic understanding of the process. In most cases, New York courts will often take the following into consideration when making a domicile determination:
- Physical location. One of the most common factors is a review of where the taxpayer spends their time. As such, New York courts will likely review the number of days spent in each state.
- Home. The courts will often look into the size of the home. They may compare the size of the taxpayer’s new home in the state the taxpayer has chosen to relocate with their previous home in New York or compare with another current property if the taxpayer maintains residences in both states.
- Employment. The courts will also review the taxpayer’s work status. This can involve a review of where the taxpayer works and the location of business connections.
As noted above, changing domicile is a perfectly legal way to reduce tax obligations. Those who wish to do so are wise to take steps to ensure they do so properly. A failure can backfire and lead to additional tax obligations. The attorneys at Goldburd McCone can review and discuss your options.