Tax Considerations for Residents Leaving California
There is a lot to love about California. Beaches. Mountains. Hollywood. The Golden Gate. California has some less-than-lovely attributes too. Earthquakes. Traffic jams. Housing costs. And taxes.
A timely Los Angeles Times article dated Sep. 27, 2019 says it all:
‘HALF of California voters consider leaving state…’
California has relatively high income tax rates compared to other states. A California resident must pay California income tax on his or her worldwide income. By contrast, a non-resident of California must pay California income tax on any California-source income he or she receives, but does not have to pay California tax on any other income.
For many people, the key to minimizing California income tax is to become (or remain) a non-resident of California. Leaving California for tax savings is not always as straightforward as it might seem.
Resident vs. Non-Resident—who cares? | The Franchise Tax Board!
For California tax purposes, “Resident”—i.e., someone who must pay California tax on his or her worldwide income—includes both of the following:
(1) Every individual who is in this state for other than a temporary or transitory purpose. This can include someone who has a domicile in another state—i.e., has a permanent home somewhere else—but nevertheless is staying in California for an indefinite period.
(2) Every individual domiciled in this state—i.e., has a permanent home in California—who is outside the state for a temporary or transitory purpose.
(18 Cal. Code Regs. Sec. 17014.)
Will Moving to a State With Less or No Income Tax Really Save You Money?
Maybe. However, before leaving California to save on paying taxes insure that you are considered a non-resident of California.
Put differently, to avoid being considered a California resident for income tax purposes, an individual must: (1) have his or her permanent home (“domicile”) in another state, and (2) avoid being in California for “other than a temporary or transitory purpose.”
Leaving California to save on income taxes has some important presumptions to bear in mind:
- Anyone who spends, in the aggregate, more than nine (9) months of a tax year in California is presumed to be a California resident, even if the person has a permanent home in another state.
- Anyone who has a permanent home in another state and spends, in the aggregate, less than six (6) months of a tax year in California is presumed to be a non-resident, provided that he or she does not engage in any conduct in California other than as a seasonal visitor, tourist, or guest.
A person who is domiciled in California—i.e., has a permanent home in the state—but intends on leaving California to save on California’s high income taxes must take the following steps to cease being a California resident for tax purposes:
- Physically move to and reside in the new location to establish it as your new domicile—i.e., as your new permanent home. Selling your California house and setting off on an extended road trip will not establish a new domicile. Unless you establish a new domicile, you can still be treated as a person who is domiciled in California but absent for a temporary purposes—i.e., a California resident. You need to physically move your permanent home to an out-of-state location.
- Demonstrate by your actions that your new location is “home.” The Franchise Tax Board (California’s income tax authority) can seize on any leftover connections with California to try to establish that you are still a California resident. Important issues include:
- If possible, purchase the new home rather than lease it. This tends to establish that you have permanently moved.
- Ensure that your spouse, pets, and any dependent children also move with you to the new home.
- Spend more time in the new home state than anywhere else—especially California. The Franchise Tax Board can use point of sale transactions and other means to establish your location. Keep records, such as receipts, personal calendar, travel tickets, etc., to establish your location on any given day. There is probably an app than can help you track your location on a daily basis.
- File a homestead exemption for your new home if allowed under local law.
- Get new drivers’ licenses in the new home state.
- Get new professional licenses in the new home state.
- Register to vote in the new home state.
- Cancel your membership in any California clubs, religious affiliations, party affiliations, country club memberships, etc. Establish new ones in the new location.
- It is best to sell your California residence, as this helps to sever your ties with California. If you do not sell it, be sure to:
- Cancel any homestead exemption you have filed on the residence—the homestead exemption is basically an admission that you are a California residence.
- Rent the residence out to someone else using a written lease.
- Sell or rent out any other California properties.
- Get new physicians, dentists, accountants, and attorneys in your new home state.
- Make sure your work assignments are not in California.
- Move your valuables with you to your new home.
- Be sure to claim your new home as your residence for purposes of future tax returns.
- If possible, get new banking arrangements in your new location so that your transactions do not have a California point of origin.
- If you use a mail forwarding service, pick one that does not have a California address. (Having a mail forwarding service with a California address is not enough to establish residence without more, but—at least for one unfortunate New York resident—it can be enough to trigger a Franchise Tax Board audit.)
- Spend less than six (6) months of the year in California. If you have a domicile in another state, spending less than six (6) months in California can give you the benefit of a presumption that you are not a California resident. (On the other hand, you are presumed to be a California resident if you spend more than nine (9) months in California, even if you have a domicile in another state.) You may be able to use a smartphone app to help you track your location on a day-to-day basis. And while in California, behave like a seasonal visitor, tourist, or guest, not like a permanent resident. For example, accepting a new job in California is not the behavior of a tourist or guest. If you come back to California, keep records showing that you are here for a transitory purpose.
If you plan on leaving California for tax savings, be sure to “walk the walk”
As you probably guessed, the Franchise Tax Board takes a dim view of people who “move” to a rustic cabin in some low-tax state—Nevada, for example—but actually continue to live and work in California. So if you plan on leaving California for a low or no tax state to reduce your taxes, be sure to “walk the walk” and leave a clear paper trail while doing so.
This is a general overview of some of the challenges for those residents considering leaving California to establishing a permanent residency in another state and should not be confused with legal advice. If you’d like to talk with Jonathan about this matter, or a business, tax or estate planning matter, please contact him at email@example.com