Dual Residency: Once Bitten, Twice Taxed
by Wayne Berkowitz, CPA, J.D., LL.M
The double tax bite on the dual resident can be costly, unfair, and catch you totally unaware. If you reside in New York, New Jersey, or Connecticut and live, work, or play across state boundaries, a tax auditor could present you with an unexpected bill for tax, interest, and penalties. Although the tristates have established a credit mechanism specifically to avoid the double tax dilemma, it is far from perfect in its practical application.
Am I Considered A Dual Resident?
Under these rules you may reside in one state and easily be classified as a statutory resident of another state. So, for those of you who live in one state but work in another where you maintain a home or apartment, the danger of being declared a dual resident is very real.
What About The Credit Mechanism?
What Can Be Done To Alleviate The Double Tax?
The agreement also recommends a uniform administrative process to resolve questions of dual residency over the same period by more than one member state. Unfortunately, the NESTOA agreement is just that — an agreement. State tax agencies may not have the authority to implement the NESTOA initiatives without legislative or regulatory change.
Connecticut has taken the lead in initiating positive change. If you are domiciled in one state and are a statutory resident of Connecticut, a recent amendment provides a credit for the tax you paid in that other state. On the downside, the Connecticut statute requires that the other state must have a similar credit mechanism — and New York and New Jersey have yet to come on board. Ironically, the Connecticut statute was modeled on proposed changes to New York law that failed to be adopted by the legislature. Until coordinated changes are made — by virtually all NESTOA member states — the agreement will remain little more than a statement of good intentions. At the moment, and for the foreseeable future, it’s still let the taxpayer beware!
What Can I Do To Avoid Unnecessary Exposure To Double Taxation?
Until NESTOA or another practical agreement is enforced, all potential dual residents should be aware of the tax burdens that existing law could hang on them. With careful tax planning, you can take steps to save tax dollars without affecting your day-to-day life. If you are living close to the edge, a Berdon advisor can help you plant your feet on more solid ground.
Wayne Berkowitz, a partner at Berdon LLP, is a specialist in state and local taxes.
© 1998, Berdon LLP. All rights reserved. Revised April 2000. This article is reprinted from Berdon Highlights Vol. 7, No. 2, a publication of Berdon LLP, Certified Public Accountants, located at 360 Madison Avenue, New York, NY 10017.
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The information in this article reflects the laws, rules, and/or regulations as of the copyright or review date. Berdon makes no representation that the information contained herein is accurate after the applicable date.
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