Domicile issues for New Yorkers with out-of-state homes

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For most Americans, state and federal taxes are an expected — if sometimes unwelcome — obligation. However, New York City is one of the few American cities with its own tax on personal and business income. For that reason, New York City residents might not have favorable attitudes about their local taxing authority.

The combined city and state tax rate for a New York City resident is 12.7 percent. In addition, the city adds an unincorporated business tax rate of 4 percent on sole proprietorships or pass-through entities. Consequently, certain New York City business owners might be taxed at 16.7 percent. Of course, that rate does not include any federal tax obligations.

Some New Yorkers — perhaps aspiring screenwriters — might imagine an ingenious tax evasion strategy at this point. However, a tax attorney might agree that moving to another state or depositing funds in an offshore bank account are strategies that don’t pose a good chance of success.

Changing one’s tax residency may not be that easy. According to one commentator, tax officials will generally consider an individual domiciled in New York City unless he or she actually gives up a permanent residence and moves his or her possessions. The applicable state law defines a statutory resident as someone who spends at least 184 days in New York each tax year and who maintains a permanent place of abode in the state for over 11 months during the same period.

Nevertheless, a recent article observed that some New York City investment advisers and business owners have relocated their businesses to Connecticut. The difference in tax rates between the two locations might surprise readers. Connecticut’s top rate of income taxation is 6.5 percent. In other words, it offers a potential tax savings of 10 percent, compared to New York City’s maximum rate of 16.7 percent.

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