President-elect Donald Trump’s promise of major federal tax cuts is something many Californians are looking forward to in 2017. However, voters in the Golden State also just passed Proposition 55, which extends the 13.3% tax rate on the state’s wealthiest residents through 2030.
These personal income tax increases started in 2012, and affects the 1.5% of Californians that boast a single income filing of at least $263,000 or a joint income filing of at least $526,000. With the perpetuation of the highest marginal tax rate in the country, many tax attorneys in San Jose are not too surprised to hear that some California residents are considering relocation to tax-free Nevada, Texas, Washington, and/or Florida.
However, California’s notoriously tough Franchise Tax Board (FTB) ensures that no taxpayer takes unfair advantage of their residency status. For those Californians who actually do take the leap into another state, the FTB will maintain their rigorous standards by investigating exactly how and when you stopped being a resident.
Like many other tax attorneys in San Jose, I’ve heard of some Californians leaving the state before selling real estate or a business, cashing in on shares, or settling litigation. In some cases, these carefully organized deals and moves work out well. However, many people may face considerable challenges in officially removing themselves from California without being followed by tax authorities.
For tax purposes, anyone in the state of California that is here for any purpose other than a temporary or transitory phase is considered a resident. This definition also includes anyone with a California address that is outside the state for a temporary or transitory purpose. Additionally, if you’re in California longer than 9 months you are presumed to be a resident, and if your job requires you to be outside the state it usually takes 18 months to no longer be considered a resident. Simply put, the burden is usually put on taxpayers to prove that they aren’t a California resident.
For those who are fighting California tax bills for whatever reason, remember that virtually every detail counts. Where you own a home and where any spouse and/or children reside, and even the location of your children’s schools are considered. Where you have bank accounts, vehicle registrations, driver’s licenses, and even memberships to social, religious, professional and other organizations is also relevant.
More than anything else, where you are employed or where you own or operate a business is the key. Even if you travel extensively and are rarely in the state, a variety of these factors may still classify you as a California resident.
Taxpayers that relocate can still end up with large bills for taxes, interest, and penalties years later. Indeed, although the IRS can audit a taxpayer between 3 and 6 years after a discrepancy is found, a few specific situations can give the California FTB an unlimited amount of time to audit, especially if you never file an income tax return. Although you may claim that you are no longer a resident and have no California filing obligation, the FTB may disagree. In certain circumstances, filing a non-resident tax return might be the smartest move.