How Residents and Nonresidents Are Taxed
California residents are subject to California state income tax on all income regardless where earned. It doesn’t matter what or where the source. If a California resident derives income from investments in Saudi Arabia or from pensions that accrued while working in Ohio, California will tax that income. The resident may get a credit for payment of taxes on income earned in other states or other countries (if a tax treaty permits), but the default rule is, the income is subject to California income tax. With a rate that is currently the highest in the nation (the distinction tends to go back and forth with New York), California residency comes with a significant tax impact.
In contrast, nonresidents are only subject to California state income tax on their California-source income. That may be zero or it may be significant. California-source income takes many forms, from rents derived from California real estate to business operations to performing temporary work in-state. To give a rather public example, when LeBron James, an Ohio resident, not a California resident, plays the Lakers at Staples Center, he pays California taxes on the income he made on game night, which in his case is no small amount.
So the stakes are high when determining whether a taxpayer is a California resident or not.