Robinson Brog Leinwand Greene Genovese & Gluck, P.C. - New York City Business Litigation Attorneys

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Tax Planning for Residents Leaving New York – The Tax Accrual Rule

by Scott Ahroni

For many taxpayers and their advisors, they consider how much money they can save if they leave New York State and/or New York City. However, few consider New York’s tax accrual rule which could increase the amount of income tax paid by the taxpayer when he or she changes their New York tax resident status.  The accrual rule is essentially designed as an “exit tax,” imposing a tax on all income that the taxpayer accrued before their change of residence.[1] This applies to changes in residency from New York City as well.[2]  To make matters worse, the tax is imposed regardless of whether the taxpayer actually received the income before the residency change.

               The New York tax regulations provide that the taxpayer must include in her income “all items required to be included if a federal income tax return were being filed for the same period on an accrual basis.”[3] To determine when the accrual occurs, both the New York State Department of Taxation and Finance (the “Department”) and New York courts generally rely on the all-events tests provided in federal regulation §section 1.446-1(c)(ii)(A).[4] Under this test, income is “included for the taxable year when all the events have occurred that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy.”[5]

               The Department has successfully used the tax accrual rule to impose immediate taxation on taxpayers who changed their New York residence during the year as follows:

  • NY Residents who had sold property pursuant to an installment sale but not all payments were made at the time they changed their tax residence;
  • New York residents who were executives receiving incentive compensation when the compensation was paid after they changed their tax residence;
  • New York residents who won the lottery, but full payment had not yet been made at the time they changed their tax residence.

If your client is changing his or her New York tax resident status and is currently holding property which he/she acquired in a tax-deferred transaction including under IRC §1031 or through a Qualified Opportunity Zone Fund the tax accrual rule may apply. 

The tax accrual rule can also trigger gain when a taxpayer moves into New York. In the Matter of Glenna Michaels, DTA No. 823370, the Division of Tax Appeals (“DTA”) determined that proceeds from the sale of the taxpayer’s out-of-state home, which occurred before she moved into New York City, was subject to New York tax because she did not receive the sale proceeds until she moved into New York City. The basis for the ALJ’s decision was that there was not a completed sale until the closing had occurred, title was transferred, and payment was made.

The immediate payment of tax due to the tax accrual rule can be delayed if the taxpayer files a bond or other acceptable security with the Department and must also agree to report the accruable income when it is actually received. 

With approximately 70,000 New Yorkers having left the metropolitan area in 2020 due to the pandemic, this tax accrual rule will be important and more relevant than ever to their tax plan. For more information on the rule and how it could affect you or your clients, contact us here.

[1] N.Y. Tax Law § 639(a). 

[2] N.Y.C. Admin. Code section 11-1754(c).

[3] NY Reg. §154.10(a).

[4] New York Advisory Opinion TSB-A-16(1)I (Mar. 15, 2016); and Treas. reg. section 1.446-1(c)(ii)(A) (“Generally, under an accrual method, income is to be included for the taxable year when all the events have occurred that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy.”).

[5] See Matter of Blanco, 723 N.Y.S.2d 558, 560 (3d Dep’t 2001).

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