As a tax attorney in Oakland, I hear from an ever increasing number of California residents who want to exit the state due to its high-tax status. However, California state and local governments are aware of this issue, and are making it increasingly difficult to leave. The Tax Cuts and Jobs Act introduced several reforms, one of which is a $10,000 cap on local and state tax deductions.
Now that the new guidelines are in place, the idea of moving to a low-tax state has become an appealing strategy to certain individuals. Subsequently, the new tax laws have resulted in numerous citizens seeking to maintain a legal residence in a state where liabilities can be limited. However, some states, including California, are not making it easy for individuals to establish permanent residency in another part of the country.
Changing a Domicile Not Always Easy
A person’s state of “domicile” is what determines his or her estate and income tax rates, as well as the rates on other taxes the person may owe. Changing a domicile, however, is not as easy as it may at first appear. The process requires the person to physically move to the new state with an intent to remain there indefinitely or permanently. Nevertheless, states such as California do not appear pleased when individuals make such a move, particularly if they were once large taxpayers in the Golden State. Rather, the government aggressively seeks to prove that the person did, in fact, move to a new state on a permanent or indefinite basis and if not, the individual is usually pursued for any taxes owed.
A Permanent Move May Not be Enough
Even moving permanently may not be enough if the person still owns property in California. If the latter is the case, the individual must offer proof that he or she resided in the new domicile for a minimum of 183 days during each one-year period. Because it is the taxpayer’s burden of proof to establish his or her domicile, it is important for people to keep detailed records of where they reside and for how long. Such individuals should keep as many records as possible, including airfare, gasoline, and EZ pass receipts, as well as copies of utility bills.
Many Californians Relocating to Texas or Washington
This relocation trend is also at play in other areas of the country, including New York, where some residents have chosen Florida as their new domicile as a consequence of Tax Cuts and Jobs Act. This move is especially popular among those who already have vacation homes in the Sunshine State.
Last year, however, California–a high-tax state–had the most significant exodus of domestic residents, with the majority of those individuals headed to Washington, Arizona or Texas. Texas and Washington do not collect state income tax.
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