As we have witnessed the national sweepstakes for the right to host Amazon’s new headquarters, it has heightened the awareness that corporate executives and high-level employees must have for the potential state and local tax consequences of relocation or even participating in the decision-making process.
Essentially, employees whose duties are transient in nature and have higher incomes are far more likely to become targets for increased taxation by state and local taxing authorities.
We have seen this with our clients, many of whom are not moving across the country like many Amazon employees may move to New York or Virginia from Seattle, but who commute from one state to another on a daily basis for work. For example, Connecticut residents who work in New York City are among the most common targets for municipal tax bodies—often in both Connecticut and New York. We also see with residents of New Jersey who commute to New York. Most frequently it is seen where an executive maintains an abode in Manhattan but contend that they are nonresidents of New York State entirely or live in upstate New York and claim not to reside in one of the five boroughs.
Given the dire condition of state and local economies, taxing authorities have become very aggressive in finding new sources of revenue. Increasingly, states have been challenging taxpayers with the trap of dual residency. It is difficult for an executive to fly under the radar as states have invested resources into identifying these executives and may even share information with other states.
This may occur when individuals who live in one state have business interests or activities in another state on a frequent basis. Although the rules may vary, most states define a resident as a person who is in the state for other than a temporary purpose. Unwary employees who are involved in relocation efforts may unwittingly find themselves being challenged by state taxing authorities as a resident.
Even though one considers a state their “domicile” or “tax home,” if an individual maintains an abode in another state and exceeds the threshold amount of days in that state (usually 183) they will be considered a tax resident. States maintain a broad definition of abode to include not only a home, but an apartment, hotel room or even a boat where someone can stay on a regular basis. The result is that two taxing jurisdictions would consider that employee as a resident. Not only does this raise the additional threshold of compliance but could also present a financial burden depending upon an individual’s particular circumstances. Unfortunately, the taxpayer bears the burden of proving, usually with documentary evidence, how much time is spent within a state. Taxing authorities have been known to request cell phone records, credit card records, and even toll receipts to bolster their case.
Generally, an individual is able to claim a credit in their state of domicile for taxes paid to another state. However, if the state of domicile does not impose an income tax there would be no mechanism to claim the state tax credit and the employee would be out of-pocket. For example, if an individual is a resident of the state of Florida and receives an income tax assessment from New York State, because the executive would not pay Florida income tax, they suffer an economic loss. Other issues could arise in the areas of executive compensation include stock options, grants and other forms of deferred compensation as states or localities may have differing tax treatment. An examination should be made of the executive’s total compensation package to review the timing of compensation including vesting of benefits to minimize any potential state tax traps that could be detrimental. Executives may consider negotiating for additional compensation to make up for any state tax shortfall they may encounter.
States and local taxing jurisdictions will often not discriminate in their application of the residency rules. As a result, employees may find themselves facing the scrutiny of more than one locality regarding their tax situation. In addition, employees will have to navigate local income taxes, properties taxes and other special levies. It is incumbent that executives falling under these circumstances be fully informed of the potential tax ramifications regarding a change of location.
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