One of my relatives moved into New York this year and is confused about how to report some of her income.
I had thought that most individuals operated on Cash Basis and reported income when received. However, New York has certain accrual provisions for people who move out of, or into, the state during the tax year.
The key issue is a bond that pays interest every 6 months. The interest for a six-month period was paid one month after my relative moved into New York. Does she report the full interest payment as New York income, or only 1/6 of the interest payment.
Thanks!
-- Vic Roberts Replace xxx with vdr in e-mail address.
Is the situation something this: She was a resident of state A and had a bond from the state, she moved to NY in month 5; so you're wondering whether (a) 6/6 or all of the coupon payment is considered earned while in NY and thus subject to NY tax, or whether (b) 5/6 is considered earned in state A and thus subject only to state tax in state A (where it might even be tax free), and the remaining 1/6 subject to NY tax. My logic says the answer is (b), but my logic has not always served me well on this newsgroup.
"Column A Enter the amounts you reported on your federal return. Include items you would have to include if you were filing a federal return on the accrual basis."
"Column B Enter that portion of the Column A amount that you received during your nonresident period. If you moved into New York State, include items you would have to report if you were filing a federal return on the accrual basis for the period before you changed your resident status."
-- Vic Roberts Replace xxx with vdr in e-mail address.
Thanx, I also read some of the instructions referred to by Alan and NY Pub 88 "General Tax Information for New York State Nonresidents and Part-Year Residents".
I'm baffled. What possible purpose could this treatment have, since accruing deductions would probably offset any increased tax revenue from accruing income?
As a practical matter, how is one supposed to transition from being a cash-basis tax payer in the previous year of full-time residence, to an accrual-based one in the current year of part-time residence? On the federal side, changing from cash to accrual accounting method is a big deal and requires a special form. Further, in a part-year resident situation, the other state involved will most likely still be using cash-basis accounting, so it seems like this treatment will inevitably create double-taxed income (and the need to claim related credit) where otherwise none would have existed.
How do preparers deal with this, how does the state audit and enforce it?
Here is what I have concluded: The part-year resident must use the accrual method if the amount is fixed and determinable and the t/p has an unrestricted right to the funds. My understanding of fixed and determinable by the IRS means that a right to receive the income becomes fixed at the earliest of required performance, the date a payment is due or the date the payment is made. As this was a bond that pays interest every 6 months. The earliest date would be the date paid.
Effectively, this puts the t/p back on the cash basis. The payment is taxable only be New York.. the state of residence on the payment date.
I'm not disagreeing; but I also read (below) something about how future payments from winning the lottery, to be received over a number of years, would suddenly be taxable all at once on the accrual basis in the year of less-than-full-time residency. I'm not sure what "required performance" means, however.
From NY Pub 88:
"If you had a right to receive income without restriction or contingencies at or before the date of the change of residence, this income would be accruable at the time you changed your residence, even if the income is actually received after you move out of New York State. Examples of accruable items of income are:
? the unrealized income from an installment sale made while you were a resident,
? payments that you will receive from a lottery that you won while you were a resident,
? bonuses (if the amount to be received is fixed and determinable at or before the date if the change of residence), and
? severance pay (if the amount to be received is fixed and determinable at or before the date of change of residence)."
You got me... I don't know if interest from a bond (assuming it is not a treasury bill or note) is considered to be fixed and determinable with an unrestricted right to receive it.
Hopefully a NY practitioner will shed some light some light on this. Us cowboys in NM don't worry about such convoluted state tax rules.
The accrued interest is generally fixed and determinable; the right to receive it is not unrestricted, because the company could file bankruptcy or default prior to the payment date. In addition, in order to get accrued interest paid prior to the coupon date, you'd have to sell the bond.
The provision to which you refer is in NY Tax Law Sec. 639. There are a few other states that have similar statutory provisions, including Connecticut and Arizona. California had a similar law (CRTC Sec.
17955) that was repealed in 2002.
The statute effectively puts the taxpayer on an accrual accounting basis as of the date of change of residence for purposes of determining what income is subject to New York tax, whether moving into or out of New York during the year. So, for example, if the taxpayer was employed in State A and was entitled to a bonus earned by the performance of services during the year ended December 31, Year 1, the amount of which is determined with reference to the employer's net income for that year, the bonus would have accrued as of December 31, Year 1 (because at that point, all events had occurred to fix the taxpayer's right to receive the income and to determine the amount with reasonable certainty). Then the taxpayer moves to New York on February 1, Year 2, and on February 15, Year 2, he receives the bonus check. The bonus is not taxable in New York because it is not from a New York source and it accrued to the taxpayer before he became a New York resident. Most states (including California since the repeal of its similar statute) would tax the bonus because the taxpayer was a resident when he, a cash basis taxpayer, received the cash. Of course State A would tax the same income on a source basis. The new state generally would allow credit for the tax paid to the source state.
New York takes this a step farther for individuals who move from New York to another state. (Connecticut has a similar provision.) Such an individual is subject to New York tax on all income that has accrued prior to the date of change of residence, regardless of any special tax rule (such as installment sale reporting) that delays tax recognition of the income. The lottery is an example; if you won a lottery as a resident, and the winnings are paid out over a period of years, and you become a nonresident of NY before collecting the entire amount, you have two choices. Either you post a bond with the State of New York and agree to be taxed as if you were a NY resident on the amounts as you collect them, or you pay tax to New York on the entire amount of your winnings in the year of change of residents. The same would apply to recognition of the gain on the sale of property on the installment basis.
I believe that New York, being a high tax, and high income state, is more concerned with losing tax from people who retire to other, low tax states after being employed here, especially in high paying jobs.
The tax payer does not transition from cash to accrual. They only apportion their NY income between NY and the "other" state AS IF they were on accrual basis.
-- Vic Roberts Replace xxx with vdr in e-mail address.
Wait, what? The income to be apportioned is determined on a cash basis, but the apportionment formula is determined on an accrual basis? I must still be missing something.
It really sounds like if you have 15 years of taxable lottery payments coming, you better pay NYS tax on all of it now, and claim an "other state" tax credit for the next fifteen years (if your new state even has a tax, of course).
Or, as Katie and Pub 88 mentioned, put up a bond to guarantee you file as a NYS resident for the next fifteen years and pay your tax due.
Which could lead to an interesting result: what if a taxpayer lacks the cash to do either of those? He wins the lottery in 2010, and has no assets other than the remainder of his first annual payment. He can't post sufficient bond, and he certainly can't pay tax on the next
24 years' worth of payments.
The Constitution doesn't allow New York to prevent him from moving out. Does he declare bankruptcy and tell New York it loses?
See the instructions to NY Forms IT 260 and IT 260.1
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It could be pretty hard for a person who has lottery or installment sale payments coming to get into bankruptcy court. A taxpayer who didn't have enough cash to pay the tax probably could borrow against the income to be received in the future, enough to buy a surety bond or qualifying securities to secure payment of the tax.
NY and CT are the only two states I know of that have this accelerate- or-post-bond requirement, and I'm not aware of a case challenging the rule on constitutional grounds, but it's an interesting idea.
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