High net worth folks with several homes often strive to avoid being counted as a resident of a high-tax state. The movement toward a new state of residence has reportedly accelerated in some states, perhaps because of the coronavirus pandemic or the widespread urban unrest during the summer of 2020.

Losing one's status as a state taxpayer is not always easy. Traditionally, it's meant keeping careful count of how many days are spent in said state, and now there are apps for that. States such as New York and California have become more sophisticated in their efforts to tax the rich.

Days spent in state represent only one of five tests New York applies. The state also looks at the size and cost of the New York home compared with those in other states, a person's business and family ties to the state, and a category that looks at where 'near and dear' items are kept."

That last category is popularly known as the "teddy bear" test.

An example

Bloomberg News provides an illustration of the teddy bear test with the story of Gregory Blatt, a New York City resident and a rising star. In 2009 he was recruited by Barry Diller to move to Texas to become chief executive of Match.com. For the first few months he continued to live in New York, commuting to Dallas as needed. But soon he rented an apartment there, joined a gym, and made Dallas his residence. He lived there for two years, filing his income taxes for 2009 and 2010 as a Texas resident. Then he moved back to New York City.

In 2013 Blatt was audited by New York's tax authorities. They concluded that he had always remained a citizen of New York, and so owed more than $400,000 in back income taxes.

At trial, Blatt's attorney's invoked the teddy bear test. Blatt had written an e-mail noting that "Dog is the final step that I haven't been able to come to grips with until now. So Big D is my new home."

The trial judge was satisfied that when the dog was moved, the test was satisfied, and Dallas was genuinely Blatt's new domicile. She cancelled his tax bill.

Steps to take

The federal income tax cap on state and local tax deductions has further motivated some rich to flee their domiciles in higher tax states. It has also motivated the high-tax states to fight back. In addition to checking for stuffed animals or pets, states may examine cell phone records and Facebook posts.

Some of the steps commonly recommended to prove a change of domicile include:

  • registering to vote in the new state;
  • obtaining a new driver's license;
  • registering one's car in the new state;
  • updating estate plans, noting the new residence;
  • joining a new church or temple.

Carefully documenting the days spent in each state should also prove helpful should the state tax collectors come knocking.

(October 2020)
© 2020 M.A. Co. All rights reserved.