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State Income Taxation of Israeli Citizens

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.


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  *David A. Fruchtman is an attorney in the United States. He is not admitted to the Israeli Bar and does not practice Israeli law. He is Of Counsel to Horwood Marcus & Berk Chartered, located at 180 N. LaSalle Street, Suite 3700, Chicago, Illinois 60601. He is a Harvard Law School graduate and is chairman of the American Bar Association’s Income and Franchise Taxes subcommittee. He has been named by his peers as one of Chicago’s Leading Tax Lawyers. Horwood Marcus & Berk Chartered has one of the largest state and local tax law practices in the United States. The firm provides tax planning advice to clients of all sizes and has successfully represented clients before courts and administrative tribunals throughout the country, including at the United States Supreme Court.  
  This Alert is for discussion purposes only and does not constitute tax advice; consequently, it is not subject to the attorney-client privilege and does not constitute attorney work product. This Alert may be disclosed to any and all persons, without limitation of any kind, including any potential tax treatment or tax structure of any transaction described hereon. This Alert does not provide federal tax advice and was not prepared in a form to comply with the requirements of an opinion upon which a taxpayer can rely to avoid certain penalties under the Internal Revenue Code of 1986, as amended. No fee was received in connection with producing this Alert.© 2007 David A. Fruchtman