Articles Posted in California Income Tax

(and why you should care)

If you spend a considerable period of time in California each year and have developed significant contacts here you should be asking yourself this question.  The State of California is hungry for tax revenue and believes that people who are present in California enjoying the benefits of all California has to offer for significant blocks of time each year should be paying their way. 

“How will the California Revenue authorities become aware of my existence here?” The Franchise Tax Board has a number of programs designed to identify people who are here under circumstances that make them liable for filing a California income tax return.  Those programs include, for example, looking at California homeowners who have a mortgage on their California property (and receive a Form 1098 from their lender), but don’t file a California tax return.  They can also examine property tax payments made by persons having an out of state address on their tax bills.  Rumor has it that they even resort to taking down out-of-state and foreign license plate numbers on luxury cars driving through the desert. Sometimes, somebody (like a disgruntled former spouse, lover or employee, or a jealous or vindictive neighbor) just turns you in. 

Whether you are a U.S. or foreign citizen, if you have lived in California as a tax resident for any period of time, unshackling yourself from the California tax authorities when you want to leave can be a very tricky affair.  The California tax authorities do not relinquish jurisdiction to tax you lightly and are known to try to hold on as long as possible, including through litigation, if necessary.  Moreover, since a determination of the local tax authorities that you remain a California resident is presumptively correct, a departing former resident bears the burden of proving that the tax authorities’ determination is incorrect.

California has been contending with its tax residents leaving for lower-tax or no-tax states such as Nevada and Washington State for decades and, as discussed below, is extremely wary of claims that a California resident has moved to Nevada, in particular.  The cause of that concern is not so much a person who actually gives up all contacts with California, truly establishes a permanent home elsewhere and spends little time, if any, in California following the move.  Rather, California is very wary of its tax residents allegedly moving out of California, but continuing to own property here (including the taxpayer’s former residence), maintaining all of their former contacts here and spending considerable amounts of time here, while establishing few contacts with Nevada (other than setting up a post box there), spending less time in Nevada than California after the alleged “move” and making little or no investment in setting up a lifestyle in Nevada.

California imposes tax on the worldwide income of its tax residents at rates reaching 13.3%, but only taxes nonresidents on California source income.  This potentially significant difference has become even greater for U.S. citizens or residents after recent Federal tax reform capping the Federal tax deduction for state taxes at $10,000, which many California residents reach on their property tax bill alone.  Thus, where the after-tax cost of California income tax was once considerably lower for Federal tax, it is now a full 13.3% of worldwide income for many high-income California tax residents whose California property tax bill already exceeds $10,000.  This situation creates an even greater incentive for long-time California residents to claim they have left California and become resident elsewhere (where the state tax rate is low or zero).