המאמר התפרסם לראשונה באתר
7.12.2025
In legal practice, this analysis often turns on what is colloquially known as the "Teddy Bear Test."
December 7, 2025
The article was first published in
For High-Net-Worth Individuals in New York City, the fiscal landscape is shifting. The recent election of Mayor Zohran Mamdani, with a platform focused on increasing tax burdens for high earners, has accelerated strategic discussions regarding relocation. With New York already ranking 50th in the Tax Foundation’s 2026 State Tax Competitiveness Index, the financial incentives to relocate to Israel—making Aliyah—have become increasingly compelling.
However, while the political and economic climate provides the motivation to leave, the legal reality presents significant complexities. Relocating is not merely a logistical matter of moving assets; it is a legal process of severing tax residency. This process involves navigating two distinct regulatory environments: the New York State Department of Taxation and Finance and the Internal Revenue Service (IRS).
This article outlines the critical legal tests for severing New York domicile and the federal tax implications of expatriation.
The primary challenge in severing ties with New York is the concept of "Domicile." Unlike statutory residency, which is based on day counts, domicile is defined by the taxpayer's intent to make a place their permanent home. To successfully change domicile to Israel, a taxpayer must demonstrate by "clear and convincing evidence" that their center of gravity has shifted.
In legal practice, this analysis often turns on what is colloquially known as the "Teddy Bear Test."
This concept is derived from the principle that individuals keep their most sentimental and valuable possessions where they consider their true home to be. If a taxpayer relocates to a rental property in Tel Aviv but leaves significant art collections, family heirlooms, and sentimental items in a New York residence, auditors may interpret this as evidence that the move is temporary.
The legal precedent for this approach is found in the Matter of Blatt. In this landmark case, an administrative law judge ruled in favor of a taxpayer largely because he had moved his dog—a "near and dear item"—to his new jurisdiction. This underscores a critical lesson for those moving to Israel: the physical relocation of the individual must be accompanied by the relocation of the items that define their personal life.
New York State maintains a rigorous residency audit program. As noted by tax attorney Kenneth T. Zemsky, the burden of proof in these examinations rests entirely on the taxpayer. The presumption is often that the taxpayer remains a resident until proven otherwise.
Auditors utilize advanced forensic methods to verify a taxpayer's physical presence and intent. This includes subpoenaing cell phone records to track location data, analyzing credit card transactions to establish lifestyle patterns, and reviewing E-ZPass logs. The danger of inconsistent documentation cannot be overstated; even a minor oversight, such as checking a "resident" box on a form to receive a local discount or tax exemption, can be fatal to a case.
Furthermore, taxpayers must be wary of the "Convenience of the Employer" rule. New York aggressively taxes remote workers. If an individual relocates to Israel but continues to work remotely for a New York-based firm for their own convenience (rather than the employer's necessity), New York may continue to tax 100% of the wages derived from that employment.
Successfully severing New York domicile addresses state tax liability, but it does not end your relationship with the IRS. As a U.S. citizen, you remain subject to federal taxation on your worldwide income regardless of where you live. Moving to Israel does not automatically trigger an "Exit Tax"; rather, it shifts you into a regime of international reporting.
However, for those taking the final step—renouncing U.S. citizenship or long-term residents surrendering a Green Card (held for 8 of the last 15 years)—the Federal Exit Tax becomes a primary concern.
Under IRC Section 877A, the IRS categorizes individuals as "Covered Expatriates" if they meet specific criteria, such as a worldwide net worth exceeding $2 million or a certain average annual income tax liability.
For Covered Expatriates, the tax consequences are significant. The IRS imposes a "Mark-to-Market" tax, treating the individual as if they sold all their worldwide assets on the day prior to expatriation. Capital gains tax is levied on the unrealized appreciation of assets, including real estate and private business interests.
Additionally, Section 2801 imposes an inheritance tax regime on Covered Expatriates. Any gift or bequest made by a Covered Expatriate to a U.S. citizen or resident is subject to a tax of approximately 40%, payable by the recipient. This provision effectively creates a double taxation scenario: once upon expatriation and again upon the transfer of wealth to U.S. heirs.
To mitigate these risks, proper planning is essential. The most effective strategy for severing residency is known as "Leave and Land."
It is insufficient to merely leave New York; the taxpayer must affirmatively "land" in the new jurisdiction. This involves more than purchasing real estate; it requires establishing a new center of social, medical, and family life in Israel. Retaining significant ties to New York—whether through business involvement, social clubs, or medical providers—can undermine a claim of changed domicile.
As the tax landscape evolves, High-Net-Worth Individuals must ensure that their relocation strategy is as robust as their reasons for moving. In the eyes of the law, one cannot possess two domiciles simultaneously; the objective evidence must clearly support the claim that New York is no longer home.
