Posted by Shane Mason, CPA
Do you live and/or work outside of the US but maintain a home in New York? New York residency rules may be costing you over 10% of your income unnecessarily. In today’s REMcycle, I’ll explore a tax break referred to as the “548-Day Rule,” useful for New York domiciliaries who spend most of their time outside of the country.
New York is, and has been, one of the most desired states to live in for centuries. Rich and poor, American or immigrant, New York’s myriad opportunities draw taxpayers like a moth to the neon ATM sign outside of your favorite bodega. Unfortunately, that appeal translates directly into some of the highest living costs in the world, including high tax rates. Not only can New York income tax rates cap out at 8.82% with an additional 3.876% for New York City residents, but New York will tax your worldwide income if you are deemed a resident of the state. That means that income from foreign wages, real estate, investments, etc., will all be subject to these steep rates.
So what makes someone a “resident” of New York?
DOMICILE VS. STATUTORY RESIDENCE ISSUES
New York employs two different tests to determine if a taxpayer is a resident of New York and thus subject to taxation on their worldwide income: the Statutory Residence Test and the Domicile Test.
The Statutory Residence test, the quantitative view of residency, will sound familiar to taxpayers avoiding US residency status at the federal level due to the 183-Day Rule. Similar to the federal definition of a US resident, if a taxpayer spends more than 183 days in New York during the tax year, they have met one of the two tests to be classified as a statutory resident – the second and concurrent requirement being that the taxpayer maintains a permanent place of abode in New York. If you spend this much time in New York, the 548-Day Rule will not be able to save you.
Taxpayers defined as residents under the Domicile Test, however, have options. If you lived in New York previously and are attempting to break residency, the Domicile Test is a qualitative barrier to exit. New York auditors will review where you spend your time, where you do business, where you define your “home,” and a number of other items that can paint a subjective picture of money leaving your wallet. It can be very difficult to change your domicile away from New York if you maintain a home there.
Now that I’ve provided (over)simplified summaries of New York’s residency traps, let’s explore how the 548-Day Rule provides tax relief for those taxpayers deemed domiciliaries of New York.
First things first, why is it called the 548-Day Rule? Simple. The test allows a taxpayer to review 548 days (a year and a half) to determine if they are a resident of New York based on their physical presence during the chosen period. The period can be any 548 days the taxpayer chooses, as long as 365 of those days fall within the tax year in question. These 548 days chosen create the context for jumping through the three hoops necessary to avoid New York residency:
- The taxpayer must spend fewer than 90 out of 548 days inside New York;
- They must spend more than 450 out of 548 days outside of the country; and
- During the short period, or the section of the chosen 548 days that fall outside of the tax year under question, the ratio of days spent in New York divided by 90 cannot exceed the ratio of days in that short period divided by 548.
An important caveat to taxpayers’ reviewing these thresholds is that your spouse or minor children count in your stead. So if you head back to France to run Société Générale but leave your spouse behind to manage the home, your worldwide income will be taxed by New York.
SHIFTING THE SCALES
Minor algebra aside, the most important and complex facet of the 548-Day Rule is the ability to shift the 548-day period at will. As an example, if a 2015 tax year is under review, and the taxpayer spent 91 days in New York at the end of 2014 (failing the first test) but zero days in New York during 2015, the taxpayer can shift the 548-day period forward to include the first half of 2016 instead. This shift is a blessing in its ability to alleviate taxation, but a curse in its complexity, as it can trip up even seasoned practitioners.
I’ve only grazed the edges of New York’s complicated residency rules here. New York is one of the most aggressive residency auditors among the 50 states, and a prudent taxpayer will trust this issue to an experienced professional.