New York Advisory Opinion TSB-A-84 (3)I: How is a nonresident employee's sick leave and vacation pay allocated to New York if she worked entirely within New York during the year, and can a nonresident couple claim the federal marriage penalty deduction based on the lower-earning spouse's out-of-state income?

Plain-English summary

Frederick E. and Annis L. Dimmitt, a married couple domiciled in Indiana, raised two questions. Annis, a Veterans Administration employee, transferred to Bath, New York in 1981 while keeping her permanent residence and domicile in Indiana with her husband; she retired in September 1982. Her 1982 wages through her retirement date included pay for days actually worked in New York plus accrued sick leave and vacation pay - most of which had been earned during her earlier employment in Indiana, though she was physically in Indiana (not New York) during the sick leave and vacation periods themselves. The couple asked (1) how her sick leave and vacation pay should be treated for New York tax purposes, and (2) whether they could claim the federal "marriage penalty" deduction, computed on the lower-earning spouse's income (Frederick's, entirely Indiana-source), on their New York return.

On the first question, the Department explained that a nonresident employee's New York-source compensation is generally allocated under 20 NYCRR 131.18(a) by the ratio of working days spent in New York to total working days everywhere - and critically, non-working days (weekends, holidays, sick leave, vacation) don't count as days worked outside New York, even if the employee was physically elsewhere on those days. Sick pay and vacation pay are treated as wage continuation for the working days actually performed during the year, not as compensation tied to wherever the underlying right to that pay was earned. Because Annis had no working days outside New York during 1982 (her only 1982 work was in New York), the allocation ratio worked out to 100% - meaning all of her 1982 wages, including the sick and vacation pay attributable to service performed years earlier in Indiana, became fully New York-source and fully taxable, since she's a cash-basis taxpayer taxed on income when paid regardless of where or when it was earned. The only way wages get allocated by when earned rather than paid is the special accrual rule under Tax Law § 654(c), which applies only when a taxpayer changes residency status - which didn't happen here.

On the second question, the Department applied the source-based structure of Tax Law § 632(a)(1): a nonresident's New York adjusted gross income includes only federal items connected with New York sources. Since Frederick, the lower-earning spouse whose income determines the size of the federal IRC § 221(a) marriage-penalty deduction, earned all of his 1982 income in Indiana, that deduction isn't connected with New York sources and so isn't allowable in computing the couple's New York adjusted gross income.

What this means for you

Nonresident employees who worked entirely in New York for part of a tax year, but earned sick leave or vacation time while working elsewhere in prior years

Don't assume sick or vacation pay retains the tax character of where it was originally earned. New York allocates it using your working-days ratio for the year it's paid - if you had zero non-New-York working days that year, it's fully New York-taxable regardless of when or where the underlying leave accrued, unless you're in the middle of a residency-status change covered by the § 654(c) special accrual rule.

Nonresident married couples where one spouse earns all income outside New York

The federal marriage penalty deduction (based on the lower-earning spouse's income) doesn't carry over to your New York nonresident return if that spouse's income isn't New York-source - New York's source-based adjusted gross income computation excludes federal deductions tied to non-New-York income.

Accountants preparing nonresident returns involving mixed in-year and prior-year compensation

Apply the working-days ratio to the tax year in which compensation is actually paid (for a cash-basis taxpayer), not the year or location where the underlying services were performed - sick leave and vacation pay follow the payment year's allocation, not the earning year's.

Common questions

Q: I worked entirely in New York this year as a nonresident, but I'm being paid out sick leave I earned while working in another state in prior years - is that New York-taxable?
A: Yes, generally in full. Because you had no non-New-York working days in the year the sick pay is received, your working-days allocation ratio comes out to 100% New York, and sick/vacation pay is allocated the same way as regular wages for that year.

Q: Can my nonresident spouse and I claim the federal marriage penalty deduction on our New York return if one of us earns everything outside New York?
A: No, not if the lower-earning spouse's income (the income the deduction is based on) isn't connected with New York sources - New York's nonresident adjusted gross income computation only picks up federal items tied to New York sources.

Q: Would the answer on sick leave change if I were in the middle of switching from nonresident to resident (or vice versa) status?
A: Possibly - Tax Law § 654(c)'s special accrual rule lets wages be allocated based on when earned, rather than when paid, but only during a change of residency status. Absent that kind of change, the standard working-days-in-the-payment-year method applies.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1984.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a84_3i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-84 (3) I
Income Tax
October 8, 1984

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I830830A

On August 30, 1983 a Petition for Advisory Opinion was received from Frederick E. and
Annis L. Dimmitt, 2126 Cheri Court, Fort Wayne, Indiana 46933.
The issues raised by Petitioners are (1) the proper treatment, for purposes of the personal
income tax imposed under Article 22 of the Tax Law, of paid sick leave and vacation days of a
nonresident who performs services for an employer wholly within New York, and (2) the proper
computation of the Federal marriage penalty deduction when the spouse with the lesser wages works
entirely without New York State.
Petitioners are husband and wife who maintain both their domicile and residence in Indiana.
During 1981, wife, an employee of the Veterans Administration, accepted a transfer to Bath, New
York. Although she resided in temporary government quarters while in New York, wife maintained
her permanent residence and domicile in Indiana with husband. Wife retired effective September 6,
1982. Her 1982 wages through September 6 represented payment for days worked in New York, as
well as for accrued sick leave and vacation (most of which was earned during her employment in
Indiana). Wife resided in Indiana during the periods of sick leave and vacation. Husband's 1982
wages were earned entirely in Indiana.
The New York adjusted gross income of a nonresident individual is the starting point in
determining tax due under Article 22 of the Tax Law, and includes the net amount of items of
income, gain, loss and deduction entering into Federal adjusted gross income which are "derived
from or connected with New York sources". Tax Law, § 632(a).
The Regulations issued in accordance with the foregoing provide, in relevant part, that:
"The New York adjusted gross income of a nonresident
individual rendering personal services as an employee includes the
compensation for personal services entering into his Federal adjusted
gross income, but only if, and to the extent that, his services were
rendered within New York State . . . Where the personal services are
performed within and without New York State, portions of the
compensation attributable to the services performed within New
York State must be determined in accordance with Sections 131.16
through 131.18 of this Part." 20 NYCRR 131.4(b).
Section 131.18(a) of the Regulations further provides that:

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-84 (3) I
Income Tax
October 8, 1984

“If a nonresident employee . . . performs services for his
employer both within and without [the] State, his income derived
from New York State sources includes that proportion of his total
compensation for services rendered as an employee which the total
number of working days employed within [the] State bears to the total
number of working days employed both within and without [the]
State. . . . In making the allocation provided for in this section, no
account is taken of non working days, including Saturdays, Sundays,
holidays days of absence because of illness or personal injury,
vacation, or leave with or without pay.” 20NYCRR 131.18(a).
In making the above allocation, only actual working days are considered. 20 NYCRR
131.18(a). As expressly provided in the regulations, holidays, sick leave, and vacation days are not
deemed to be working days outside New York State for purposes of allocation of income, even if the
employee is not within New York State for the dates paid. Cf., Clausi, State Tax Commission
Advisory Opinion, May 22, 1981, TSB-A-81(3)-I; Fleisher, State Tax Commission, August 17,
1979, TSB-H-79-(156)-I. Rather, salary paid for non-working days is a form of wage continuation
for work performed during the year on working days. Such payments constitute regular earnings as
an employee even though taxpayer did not actually render any services for compensation. Howell,
State Tax Commission, September 28, 1979, TSB-H-79-(215)-I.
In the present case, all wife's 1982 working days were entirely within New York State.
Although Section 131.18(a) of the Regulations outlines the method of allocating income when an
employee works both within and without the State, the nature of the regulation mandates its
application to employees working wholly within New York as well. That is, under this computation
the portion of income allocable to New York varies inversely with the number of days worked
without New York during the tax year, so that income becomes wholly taxable once the taxpayer has
no working days outside the State during the tax year. In such situation, exactly as is the case with
respect to tax years during which work is performed both within and without New York, income
received as sick pay or vacation pay is allocated in accordance with the taxpayer's work experience
during the tax year or other applicable period, wholly without consideration of when the right to
receive such sick pay or vacation pay may have been acquired. Further as Petitioner is presumably
a cash basis taxpayer, sick pay and vacation pay are taxed when paid despite the fact that they may
have been earned in a prior year and in a different state. Wages may only be accrued based on when
earned rather than when actually paid in a situation where an individual changes status from resident
to nonresident or vice versa. Tax Law, §654(c). In the present case, however, this special accrual may
not be made as Petitioners did not change their state of residence.
Second, for Federal tax purposes, married couples filing a joint return are allowed a
deduction based on the qualified earned income of the spouse with the lesser earned income.
I.R.C., §221(a). To determine New York adjusted gross income for non-residents, New York
adopts as a starting point that part of Federal adjusted gross income "derived from or
connected with New York sources. Tax Law, §632(a)(1). In the present case husband is the
spouse with the lesser qualified income. Since all of his 1982 income was earned in Indiana,

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TSB-A-84 (3) I
Income Tax
October 8, 1984

the deduction as calculated in accordance with §221(a) of the Internal Revenue Code is not "derived
from or connected with New York sources," as required by §632(a)(1) of the Tax Law. Thus, the
deduction is not allowable in determining their New York adjusted gross income.

DATED: August 7, 1984

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.