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).
The California concept of “tax residence” has two formulations, depending on where a person has his or her “domicile”: (1) Persons whose “domicile” is outside California become tax residents if they are present in this state for other than a temporary or transitory purpose (for a discussion the residence standard applied to foreign or out-of-state domiciliaries, see the blog on this website entitled “California Resident or Nonresident?”). (2) Persons who have established “domicile” in California (discussed below) remain tax residents here when they leave if they are considered to be absent from California for only a temporary or transitory purpose. Whether a person is present or absent from California for a temporary or transitory purpose depends on the facts and circumstances of each case. The determination is not based on intent alone, but on objective facts demonstrating the relative strength or weakness of the individual’s connections with California and the state (or country) of which the person now claims to be a tax resident.
The California concept of one’s “domicile” is the place where an individual has his true, fixed and permanent home and principal establishment and to which he or she has, whenever absent, the intention of returning. It is the place where a person has voluntarily fixed their habitation and that of their family, not for a mere special or limited purpose, but with the present intention of making a permanent home with no present intention of removing therefrom. A person who is domiciled in California and who leaves the state retains his or her California domicile as long as he or she has the definite present intention of returning here, regardless of the length of time or the reasons why he or she is absent from the state. Such a person loses his or her California domicile only if he or she locates elsewhere with the intention of remaining there indefinitely, having abandoned any intention of returning to California.
Thus, in order to relinquish one’s status as a California tax resident, one must either prove that: (i) they have abandoned California domicile and established domicile elsewhere; or (ii) despite remaining a California domiciliary, they are outside the state for a purpose which is not temporary or transitory. Because working a change of domicile is considerably difficult for a person who can’t demonstrate having established a permanent home elsewhere and abandoned their contacts with California, the best chance to become a nonresident is to prove both that the purpose for which you left California is not temporary or transitory and that you have actually left California for an indefinite period.
As discussed above, making that case requires a marshalling of objective facts demonstrating that one’s connections with a new place of residence are more significant than those the person retains with the State of California. Lance Crossborder Law and Tax can assist you with the planning necessary to make this case. If you are beyond the planning stage and have been notified by the California tax authorities that they do not recognize your claimed change of residence, Lance Crossborder Law and Tax can help defend you against any residency-based tax assessment and/or residency tax audit that may ensue. In either case, call us as early on as you can, as time is often crucial in these cases.
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