Even after you relocate from New York to Texas, you may still owe New York State income tax on certain types of income. Understanding New York’s source income rules is crucial for determining your ongoing filing obligations and minimizing your state tax exposure after your move.
What Is NY Source Income?
NY source income is income derived from New York sources that remains taxable to nonresidents even after they’ve left the state. If you’re a Texas resident with NY source income, you must file a New York nonresident return (Form IT-203) and pay tax on that income.
Types of NY Source Income
1. Wages for Services Performed in New York
If you physically work in New York, those wages are NY source income—even if:
- Your employer is based in Texas
- You’re paid by a Texas entity
- You’re a Texas resident
- You work remotely from Texas most of the time
The key is where the services are physically performed. Days worked in New York = NY source income for those days.
2. Business Income from NY Operations
If you own a business with operations in New York:
- Income from NY locations or activities is NY source income
- You must allocate business income between NY and other states
- Partnerships and S-Corps flow through NY source income to owners
3. Rental Income from NY Property
Rental income from real estate located in New York is always NY source income, regardless of where you live. This includes:
- Residential rental properties
- Commercial real estate
- Vacation rentals
- Land leases
4. Sale of NY Real Estate
Capital gains from selling New York real property are NY source income. This applies to:
- Primary residences (even if you lived there before moving)
- Investment properties
- Vacation homes
- Undeveloped land
However, you may qualify for exclusions (such as the $250,000/$500,000 primary residence exclusion) that reduce or eliminate the taxable gain.
5. Income from NY Partnerships and S-Corps
If you’re a partner in a NY partnership or shareholder in a NY S-Corporation, your share of the entity’s NY source income flows through to you and is taxable in New York—even if you’re a Texas resident.
6. Deferred Compensation
This is where it gets complicated. Deferred compensation (bonuses, stock options, restricted stock) may be partially NY source income based on when and where you earned it.
The Allocation Formula:
NY source portion = Total compensation × (Days worked in NY / Total days worked)
Example:
- You worked for a NY employer for 5 years while living in NY
- You relocated to Texas in Year 6
- In Year 7, you receive a $100,000 bonus for work performed in Years 1-6
- Allocation: $100,000 × (5 years in NY / 6 total years) = ~$83,000 NY source income
7. Stock Options and Equity Compensation
Stock options granted while you were a NY resident may be partially NY source income when exercised, based on:
- Grant date
- Vesting schedule
- Exercise date
- Where you worked during the grant-to-vest period
RSUs (Restricted Stock Units): Taxed at vesting. NY source portion is based on days worked in NY during the vesting period.
ISOs (Incentive Stock Options): No regular tax at exercise, but AMT may apply. NY source portion calculated based on grant-to-exercise period.
NSOs (Non-Qualified Stock Options): Taxed at exercise. NY source portion based on grant-to-exercise period and where services were performed.
8. Pension and Retirement Income
Here’s good news: Most pension and retirement income is NOT NY source income for nonresidents.
NOT taxable to nonresidents:
- 401(k) and IRA distributions
- Pension payments
- Social Security benefits
- Annuity payments
Exception: If you continue working for a NY employer after relocating and earn additional pension credits, that portion may be NY source income.
9. Income from NY Trusts
If you’re a beneficiary of a New York trust, distributions may be NY source income depending on:
- Whether the trust is a resident or nonresident trust
- The source of the trust’s income
- Your relationship to the trust
10. Gambling and Lottery Winnings
Winnings from NY lottery, casinos, or racetracks are NY source income, even for nonresidents.
What Is NOT NY Source Income
The following types of income are generally NOT taxable to nonresidents:
- Interest and dividends (unless from a NY business)
- Capital gains from stocks and bonds (unless from a NY business interest)
- Wages for work performed outside NY
- Retirement account distributions
- Social Security benefits
- Income from businesses with no NY operations
The Convenience of the Employer Rule
This is New York’s most aggressive and controversial sourcing rule. Under the “convenience rule,” if you:
- Work remotely for a NY employer
- Work from home for your own convenience (not employer necessity)
- Your employer has a NY office you could work from
Then your wages are treated as NY source income—even if you never set foot in New York and live in Texas full-time.
Example: You’re a software engineer living in Texas, working remotely for a NYC tech company. Under the convenience rule, New York may tax 100% of your wages as NY source income, even though you perform all services in Texas.
Exceptions to the Convenience Rule:
The rule doesn’t apply if:
- Your employer requires you to work remotely (documented in writing)
- Your employer has no NY office you could report to
- You’re an independent contractor (not an employee)
- You work at a bona fide employer office outside NY
Challenging the Convenience Rule:
Several states (including New Hampshire) have challenged New York’s convenience rule as unconstitutional. While litigation is ongoing, the rule remains in effect. If you’re subject to it, you may need to:
- File protective returns
- Document employer necessity for remote work
- Consider challenging the rule if your situation warrants it
Allocation Methods
For income that’s partially NY source (like deferred comp or stock options), you must allocate between NY and other states. Common allocation methods:
1. Time-Based Allocation: Days worked in NY ÷ Total days worked
2. Income-Based Allocation: Income earned while a NY resident ÷ Total income
3. Grant-to-Vest Allocation (for equity comp): Days worked in NY during grant-to-vest period ÷ Total days in grant-to-vest period
Filing Requirements for Nonresidents
If you have NY source income, you must:
- File Form IT-203 (Nonresident and Part-Year Resident Income Tax Return)
- Report all income (both NY source and non-NY source)
- Calculate tax on NY source income only
- Claim credit for taxes paid to other states (if applicable)
Common Mistakes
1. Not Filing Because You Moved
Many taxpayers assume that once they leave NY, they don’t need to file NY returns. If you have NY source income, you must file—even as a nonresident.
2. Incorrectly Allocating Income
Misallocating deferred comp, stock options, or business income can result in underpayment penalties or overpayment of tax.
3. Ignoring the Convenience Rule
Remote workers often don’t realize their wages may be NY source income under the convenience rule.
4. Not Claiming Credits
If you pay tax to both NY and Texas on the same income, you may be entitled to a credit. (Note: Texas has no income tax, so this typically applies to other states.)
Minimizing NY Source Income
Strategies to reduce NY source income after relocating:
1. Sever NY Business Ties
Close NY offices, terminate NY partnerships, sell NY business interests.
2. Time Equity Compensation Carefully
Exercise stock options or time RSU vesting after you’ve relocated and established Texas residency.
3. Avoid Working in NY
If you work remotely, don’t perform services while physically in New York—even occasionally.
4. Document Employer Necessity
If you work remotely for a NY employer, get written documentation that remote work is required by the employer, not just for your convenience.
5. Restructure Deferred Compensation
Before relocating, consider whether you can restructure or accelerate deferred comp to avoid future NY taxation.
Audit Risk
The DTF aggressively audits nonresident returns, particularly:
- High-income individuals claiming minimal NY source income
- Remote workers who may be subject to the convenience rule
- Former residents with continuing NY business interests
- Equity compensation allocations
Our Services
We help clients with NY source income by:
- Analyzing income sources to determine what’s taxable in NY
- Calculating proper allocation of deferred comp and equity compensation
- Preparing nonresident returns
- Challenging convenience rule applications
- Defending nonresident audits
- Minimizing ongoing NY tax exposure
If you’ve relocated to Texas but have continuing NY income, contact us to ensure you’re complying with NY’s complex sourcing rules while minimizing your tax burden.
