Two recent losses by Israelis provide a reminder that American state taxes demand attention. Both losses involved Israeli citizens who claimed to be nonresidents of New York State and New York City. The cases highlight the mistakes that taxpayers and tax practitioners can make when they assume that state tax results will follow federal law.
Both cases involve Israelis who were in the United States under visas permitting mere temporary stays. In both cases, the taxpayers apparently assumed (or were advised) that under such a visa they could not be taxed as full time residents of New York State or New York City. The taxpayers were wrong. As a result, they were taxable in New York State and New York City on all of their income, wherever earned or received. Further, the taxpayers’ incorrect belief deprived them of the opportunity to engage in proper tax planning.
Many jurisdictions, including New York State and New York City, apply two tests in determining tax residence. One test looks at domicile, the place that one thinks of as home and to which one intends to return. This is in many respects a test of intentions. The second test looks at objective facts, including the number of days present in the state. In general, the type of visa one holds is irrelevant to the analysis of tax status under the second test. As a result, one can be taxed as a full time resident of a state even though he is not a resident of the United States.
Personal income tax residency issues are just one area where state tax laws differ from federal treatments. There are many other examples. For instance, corporations and other businesses can be subject to state income and other taxes even when they are not subject to federal income taxation. As another example, certain deductions that are allowed federally are not permitted by the states.
This State Tax Alert highlights some of the state tax traps that can catch incautious taxpayers and tax practitioners. For further information and assistance with state and local tax issues anywhere in the United States, please contact David A. Fruchtman at 04-629-0520 or at (312) 281-1111.