What Is the New York State Exit Tax?
Leaving New York has significant tax implications. Learn how to properly sever residency ties to avoid ongoing liabilities and understand what income remains taxable.
The term “New York State Exit Tax” can be misleading. It is not a formal, one-time tax on assets when you leave, but a phrase that describes the financial consequences of failing to properly sever residential ties with the state. New York is known for its aggressive auditing of former residents, and the “exit tax” represents the continued income tax liability for individuals who auditors determine have not successfully changed their permanent home.
This continued taxation arises when the New York State Department of Taxation and Finance concludes a taxpayer’s move was not a true change of domicile. The burden of proof to demonstrate a change of residency falls entirely on the taxpayer, who must provide clear and convincing evidence. Without sufficient proof, New York will continue to tax the individual as a resident on their worldwide income, not just income from New York sources.
Establishing a New Domicile
Successfully ending your tax residency in New York hinges on proving you have established a new “domicile,” which is legally defined as your true, fixed, and permanent home—the place you intend to return to whenever you are away. New York tax auditors are highly skeptical of claimed moves, particularly to low- or no-tax states, and they scrutinize these changes through a detailed audit process. The state uses five primary factors to determine if a taxpayer has genuinely abandoned their New York domicile.
- Home: Auditors compare the residences you maintain, analyzing the size, value, and nature of use of your New York property versus your new home. Selling a New York residence and purchasing a more substantial home in a new state provides strong evidence, whereas retaining a large, valuable New York property while renting a small apartment elsewhere can weaken your case.
- Active business involvement: If you continue to have significant business connections or actively manage a New York-based enterprise, even remotely, auditors may argue your economic life remains centered in the state. To counter this, you must demonstrate a clear shift in your professional life, such as retiring, selling your business interest, or establishing new employment and professional licenses in your new location.
- Time spent: While New York has a “statutory residency” rule based on spending more than 183 days in the state, the domicile test is more subjective. It examines the quality and nature of the days spent in each location. Spending holidays, family milestones, and other significant personal time in the new home strengthens the argument that it is your true domicile.
- Items near and dear: This involves moving items of high personal or sentimental value—such as family heirlooms, artwork, photo albums, and even pets—to the new home. It also includes transferring financial relationships like primary bank accounts and safe deposit boxes.
- Family connections: The location of your spouse and minor children is an especially powerful indicator. If they remain in New York, it is exceptionally difficult to prove you have changed your domicile.
New York’s Continued Taxing Authority
Even after successfully changing your domicile and becoming a nonresident, New York may retain the authority to tax certain income. As a nonresident, you are no longer taxed on your worldwide income but only on income “derived from or connected with New York sources.” This can result in an ongoing filing obligation and tax liability.
The most straightforward category of taxable income is from real property located within New York. If you move out of state but keep and rent out your former home, the rental income generated is considered New York source income. Likewise, any gain from the sale of New York real property remains taxable by the state, as do gains from selling ownership in entities that primarily own New York real estate.
Income earned from a business or profession carried on in New York is also subject to tax. This includes wages for services performed physically within the state. For example, if a nonresident consultant travels to New York City for a week-long project, the compensation for that week is New York source income, often allocated using a workday fraction.
A complex area is deferred compensation. Income such as bonuses, stock options, and restricted stock units (RSUs) earned or vesting while you were a New York resident are partially taxable by New York, even if paid years after you move. The taxable portion is allocated based on the time you worked in New York during the period the compensation was earned.
New York also enforces a “convenience of the employer” rule for remote workers. If you work for a New York-based employer from your out-of-state home for your own convenience, rather than your employer’s necessity, New York treats those wages as New York source income. To avoid this, the work-from-home arrangement must be a requirement of the employer.
Filing Requirements for Changing Residency
In the year you move out of New York, you must file a part-year resident tax return to report your change in residency. This is done using Form IT-203, the Nonresident and Part-Year Resident Income Tax Return, which officially notifies the state of your move. On the form, you must specify the exact date you moved out of New York, as this date serves as the dividing line for how your income is treated.
The function of Form IT-203 is its two-column format for reporting income. In the “Federal amount” column, you report your total income from all sources for the entire year. In the “New York State amount” column, you report only the income applicable to New York. This includes all your income during your resident period plus only your New York source income earned during your nonresident period.
After the year of your move, your filing obligations depend on whether you continue to have New York source income. If you have ongoing income from New York, such as from rental properties or work performed in the state, you must continue to file Form IT-203 each year as a nonresident. If you have completely severed all income-producing ties with the state, you may not have a filing requirement in subsequent years.