U.S. citizens are taxed on all income, regardless of where that income is earned.  New York State takes a similar approach to taxing its residents’ income.  In addition, New York subjects nonresidents to taxation on certain categories of income sourced to New York.  The state aggressively pursues taxpayers who have “resident” attributes while declaring a “nonresident” filing status.  Consequently, certain nonresident taxpayers must take care not to run afoul of the complex rules New York uses to determine residency for tax purposes.

Three determining factors

Section 605(b) of Article 22 of New York State’s Tax Law defines who is a resident of New York based on three main characteristics:

•  Domicile
• Maintenance of a permanent place of abode
• Number of days spent in the state each year.

After years of litigation, the following definitions are now incorporated in the tax regulations:

• Domicile:  “the place which an individual intends to be such individual’s permanent home – the place to which such individual intends to return whenever such individual may be absent”
• Permanent Place of Abode:  “dwelling place permanently maintained by the taxpayer, whether or not owned by him, and will generally include a dwelling place owned or leased by his or her spouse.  A dwelling which only contains bachelor quarters and does not contain facilities ordinarily found in a dwelling such as facilities for cooking, bathing, etc., will generally not be deemed a permanent place of abode.

A common instance in which careful planning is required involves New York nonresident taxpayers who have a second residence in New York State while working in New York State.  To avoid classification as a New York State statutory resident, taxpayers must be vigilant in keeping detailed records to show that, while not “domiciled” in New York, they did not spend more than 183 days in New York State.

The 2011 New York State Tax Appeals decision in the “Puccio” case has far-reaching implications.  The case illustrates how New York State pursues taxpayers in enforcing regulations and that, with very few exceptions, any part of a calendar day spent in New York is considered a full day for tax purposes.

Nonresident filers have the right to allocate their income based on days worked in New York State and would generally file Form IT-203-B to inform New York State of this allocation.  This calculation takes into account not only weekend days not worked, but also sick, vacation and other nonworking days.  However, a difficult issue arises when employees work from home and attempt to allocate those days as out of New York.  Under the rules, unless the employer obligates the employee to perform those services out of state for the employer’s benefit – where the duties cannot be performed at the employer’s place of business – those days are not considered out of state or nonworking days.

Residency and retirement

New York State residents planning to retire in another state generally must review a short checklist to determine whether a change in domicile exists for tax purposes – and can stand up to an audit.  The New York State “Nonresident Audit Guidelines” publication cites factors that are considered in reviewing a change of domicile.  Some of the factors which are typically weighted more heavily than others include:

• Do the taxpayers continue to have active involvement in businesses in New York?
• How much actual time is spent in New York each year?
• What is the location of items that the taxpayers hold “near and dear”?
• What are the taxpayers’ family connections in New York and elsewhere?

The same publication also cites a number of nonfactors in considering domicile.  These include:

• Place of interment
• Location where taxpayer’s will is probated
• Location of bank accounts
• Place where individual income tax returns are filed

Finally, several factors are considered to definitively show intention to effect a change in domicile, particularly when coupled with an actual acquisition of a new residence:

• Sale of old residence
• Cancellation of voter registration in old state
• Cancellation of  checking/savings accounts in old state combined with opening accounts – including safe deposit rental agreements – in new state
• Transfer of tangible personal property of significant value to new residence
• Establishment of new affiliations with religious institutions in new community
• Cancellation of auto registration in old state in favor of new state

The Bottom Line

Due to the multifaceted nature of the New York resident vs. nonresident issue, taxpayers should seek counsel when contemplating a decision to either change their domicile or acquire a second residence.  Your AKM CPA can help you plan ahead to take the right steps to protect yourself from unnecessary tax liability.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 kept ordinary-income and long-term capital gains rates from increasing this year and established “patches” for the AMT that may help reduce or eliminate your 2011 AMT liability. The act also offers some enhanced estate planning opportunities. And it extends and expands a number of other tax breaks. That’s the good news.

But many provisions of the law — including the extensions of the lower income and capital gains tax rates — are set to expire at the end of 2012 unless Congress extends them again. In light of this uncertainty, minimizing your taxes over the next few years will require especially careful planning and timely action, as well as a thorough understanding of various tax-saving strategies.

To this end, we’re pleased to offer this tax planning guide. While it covers the tax law changes and strategies most likely to apply to your situation, there are others we simply don’t have room to include here. So please check with your tax advisor to find out what’s best for you.

Content and Excerpt -

Year-to-Date Review [Page 2] - A tremendous number of variables affect how a particular item of income is taxed and, ultimately, your overall tax liability for the year. And timing of income and deductible expenses can affect both the rate you pay and when you pay. By regularly reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability. In other words, tax planning shouldn’t be just a year end activity.

Executive Compensation [Page 6] - Executives are often rewarded for their business acumen with nonqualified deferred compensation (NQDC), stock options or restricted stock. To keep your taxes to a minimum, it’s important to be just as smart when it comes to tax planning for these complicated forms of compensation. This means both understanding the unique rules that apply to each compensation type and taking steps to use them to your advantage.

Investing [Page 8] - The 15% long-term capital gains and qualified dividend rate that had been set to expire after 2010 has been extended — perhaps making taxes on your investments less of a concern for the time being. But the reprieve is only temporary: Without Congressional action, in 2013 the capital gains rate will rise to 20%, and dividends will return to being taxed at ordinary-income rates as high as 39.6%. So there may be actions you’ll want to take now to lock in lower rates while they’re still available.

Real Estate [Page 12] - With some areas of the country starting to rebound, savvy homebuyers and real estate investors are in the hunt for those diamond-in-the rough properties that can yield big returns. Whether you’re looking for a new home or vacation home or a rental or investment property — or you simply want to make the most of your current property — the key is to take advantage of all the tax breaks available to you.

Business Ownership [Page 14] - Business owners have some tax planning concerns that are different from those of an executive who works for a corporation. When a business is a flow-through entity (such as a partnership or an S corporation), owners need to be concerned about how its annual performance will affect their own income tax liability. But they also need to look at how their business can help them achieve their long-term personal financial goals.

Charitable Giving [Page 16] - Not only does giving to charity allow you to do good, but it also can be one of the most flexible tax-saving tools available to you. Why? Because you have complete control over when and how much you give. You can give more in years where you need to maximize your deductions, less in years where you don’t. But take care: Many rules and limits apply that can affect the size of your deduction.

Family & Education [Page 18] - If you’re a parent, you likely want to do everything you can financially for your children, including ensuring they get a top-notch education. But you also want to teach them financial responsibility. If you’re a grandparent, your goals are likely much the same — plus you probably have estate planning on your mind. Knowing how you and your children (or grandchildren) can take advantage of the tax breaks available is an important step toward achieving these goals.

Retirement [Page 20] - Although you’re allowed to contribute only a limited amount to tax-advantaged retirement plans, those tax advantages make the plans especially powerful for taxpayers in the top income tax brackets. So don’t ignore these plans just because what you can invest in them annually may be small compared to what you invest elsewhere. Yet to fully leverage their power, you also need to watch out for inherent tax traps.

Estate Planning [Page 22] - There’s good news and bad news this year when it comes to estate planning. On the positive side, the 2010 Tax Relief act prevents pre-2001 tax act law (lower exemptions and higher rates) from going into effect in 2011 as originally scheduled. The act also provides some new tax-saving opportunities. But, on the negative side, these provisions apply only through 2012 and legislation has been proposed that would end some provisions sooner. (Check with your tax advisor for the latest information.)

Tax Rates [Page 24] - A chart consisting various income tax rate schedules.

The IRS will never ask for this information through a fax or email. As always, whenever you receive a request from any government authority, please forward the letter to us immediately, so we may review the letter and advise you appropriately on the proper course of action. (Click here to view a sample of this fraudulent letter in PDF format.) If you have any questions or concerns, please do not hesitate to contact us.

Many portfolios are now “out of balance” as a result of recent substantial price changes in many asset classes. Therefore, portfolios should be reviewed to determine whether rebalancing is required. It is also critical for portfolios to be reviewed to determine whether investments are appropriately allocated in light of any changes to their individual circumstances. Finally, a down market often presents attractive opportunities to purchase assets that are temporarily beaten down in price at “on sale” prices. We strongly recommend that you contact your current advisor, or contact us, for a review of your portfolio. These markets call for proactive analysis and definitive action — not complacency — in order to avoid repeating the mistakes many investors made in 2008.

Please contact us if you are interested. Rebalancing and portfolio reviews are a relatively simple but valuable component of the investment process.

Ongoing changes in tax laws, an unpredictable economy and uncertainty about the future have made minimizing taxes more difficult than ever. This is especially true for investments, because the 15% rate on qualified dividends and long-term capital gains is set to expire at the end of the year — but could be extended. To complicate matters, some new tax breaks have gone into effect this year, but only on a temporary basis. Also, income and estate tax rates are scheduled to go up in 2011 if Congress doesn’t act.

In this environment, you may need to create plans for multiple scenarios and be ready to move quickly as developments unfold. To this end, we are pleased to offer this overview of various tax-saving strategies you might employ. Of course, there are many others we don’t have room to cover here. So please check with your tax advisor to see which are best for you.

Content and Excerpt -

Year-to-Date Review [Page 2] - The top regular income tax rate on ordinary income (salary, business income, interest and more) for 2010 remains at 35%. The top AMT rate is only 28%, but it typically applies to a higher taxable income base. So it can result in unwelcome tax surprises if you plan only for regular income taxes. Also, income-based phaseouts and other limits can increase your marginal rate for regular-tax or AMT purposes.

Executive Compensation [Page 6] – Many executives are compensated by more than just salary and bonuses: They also receive stock options, restricted stock or nonqualified deferred compensation (NQDC). Careful planning for these more complex forms of compensation is critical to avoid unnecessary tax liability.

Investing [Page 8] – Tax treatment of investments can vary dramatically based on several factors — including type of investment, type of income it produces, how long it’s been held and whether any special limitations or breaks apply. Consequently, planning for investments has always been complicated. But this year, the level of complexity is particularly high because of uncertainty about what might happen with tax rates in 2011. So before you make any investment decisions, consider the potential tax consequences
under multiple scenarios.

Real Estate [Page 12] – Although the real estate market is a lot less rosy than it was a few years ago, real estate can still be a valuable investment — whether it’s your home or vacation home or a rental or investment property. Property ownership also can offer significant tax savings, as long as you take advantage of all the breaks available to you. But watch out for the limitations as well.

Business Ownership [Page 14] – For most business owners, their business is one of their bigger investments — or even their biggest. If you’re among them, special planning is required to ensure your personal financial security. After all, with your business making up a large portion of your portfolio, it may lack both diversity and liquidity.

Charitable Giving [Page 16] – Donations to qualified charities are generally fully deductible. So not only can they provide much-needed support to causes you care about, but they also can be a powerful tax-saving tool. To ensure your gifts do as much as possible for both your favorite charities and your tax bill, discuss with your tax advisor which assets to give and the best ways to give them.

Family & Education [Page 18] – It’s the hope of parents everywhere that their children grow up to be financially secure. The keys to achieving that goal are trifold: 1) teaching children from an early age the value of earning and saving money, 2) ensuring they have the financial resources needed to obtain the best quality education possible, and 3) making tax planning a family affair.

Retirement [Page 20] – For higher-income taxpayers, the contribution limits on most retirement plans may make them seem like more trouble than they’re worth. After all, the plans are subject to a variety of rules, and investment choices can be limited. Yet those in the top tax brackets also have the most tax savings to gain from such plans. The key is to make the most of the opportunities the plans offer and avoid their pitfalls.

Estate Planning [Page 22] – A one-year repeal of the estate and generation-skipping transfer (GST) taxes went into effect Jan. 1, but these taxes are scheduled to return in 2011 — at higher levels than in 2009. As of this writing, the repeal is still in effect, but Congress is expected to make estate tax law changes. This all adds up to much uncertainty and many planning challenges.

Tax Rates [Page 24] – A chart consisting 2009 individual income tax rate schedules.

Download AKM 2010-2011 Tax Planning Guide (pdf)

The practical effect of this is that the broker will report a sales transaction in its entirety if it involves a security purchased on or after January 1, 2011. The I.R.S. will match the broker reporting with the reporting on the tax return and will issue a Notice of Proposed Change if the cost basis does not agree. Therefore, it’s extremely important to make sure that the amount reported by the broker agrees with the amount reported on your tax return.

Brokers will automatically track any securities they purchase for you. For securities that were not purchased by that broker, you will be required to supply them with cost basis information. For instance, you may have inherited securities or securities that were originally purchased through a different broker. Have the cost basis information available and supply it to your broker as soon as possible so that they have it on file in case of a sale.

Several Methods for Determining Cost Basis

You should also be aware that there are many different ways of computing cost basis for a particular sale. Most brokers will use a default of first shares purchased, first shares sold (FIFO), if you do not specify a method. However, this may not be the optimal choice. Other choices include:

• LIFO (last shares purchased are the first ones sold)
• High Cost (highest shares cost are sold first)
• Low Cost (lowest shares cost are sold first)
• Specified lot (this allows you to choose specific lots as being sold, usually identified by purchase date).

You will be required to advise your broker if you choose a method other than the default method for a sale. If you trade by the Internet, you will be required to indicate your cost basis method chosen if other than a default method. Different choices will yield different tax results, so care must be taken in choosing a method. Otherwise, you may end up with an unintended tax result.

What you should do

The new reporting requirements make it critically important for most investors to engage in proactive tax planning.

Determine which shares do not have an associated cost basis, determine such cost basis and supply this information to your broker.
Contact your AKM CPA to discuss your investment goals, tax exposure and other financial issues.
Determine whether it makes sense to issue standing orders on cost basis to your broker or, instead, to determine cost basis on an individual sale basis.
Make sure that your brokers, agents and other advisors have clear instructions from you on how to determine cost basis.

As always, please call your AKM CPA if you would like more details or to plot your strategy for dealing with these new provisions.

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Facts and Figures

Download AKM Client Information Bulletin Dec 2010

• “You are due a refund.”
• “We could not verify your information.”
• “We suspect an unauthorized transaction on your account.”

Do not respond to such messages. The IRS does not contact taxpayers by email.

Any message purporting to be from the IRS is an attempt at fraud or identity theft.  You should also ignore other emails from unknown parties asking you to provide personal, tax or financial data.  Either delete such messages or, if tax-related, forward to phishing@irs.gov for investigation by the Treasury Inspector General.