California residents are subject to California state income tax on all income regardless where earned. Frequent visitors to California who are not deemed California residents are only subject to California state income tax on their California source income. So the stakes are big when determining whether one is a California resident.
Under California law, a person who stays in the state for other than a temporary or transitory purpose is a legal resident, subject to California taxation. Basically, brief vacations or transactions, such as signing a contract or giving a speech, constitute temporary or transitory purposes that do not confer residency. Every other kind of visit can confer such a status, including coming to California for health reasons, extended stays, retirement or employment that requires a long or indefinite period to accomplish.
How does the Franchise Tax Board determine whether a visit has a temporary or permanent purpose? It applies the “Closest Connection Test.” This refers to the state with which a person has the closest connection during the taxable year. For the FTB, this literally means counting all the California contacts a person has and comparing that number with the non-California contacts. Of course, some contacts simply weigh more than others. A job or real estate ownership indicates a closer tie than merely enjoying a round of golf at a country club or a concert at the McCallum. The weightiest factors for residency are:
• Amount of time you spend in California versus amount of time you spend outside California.
• Location of your spouse/RDP and children.
• Location of your principal residence.
• State that issued your driver’s license.
• State where your vehicles are registered.
• State in which you maintain your professional licenses.
• State in which you are registered to vote.
• Location of the banks where you maintain accounts.
• The origination point of your financial transactions.
• Location of your medical professionals and other healthcare providers (doctors, dentists etc.), accountants, and attorneys.
Location of your social ties, such as your place of worship, professional associations, or social and country clubs of which you are a member.
• Location of your real property and investments.
• Permanence of your work assignments in California.
This is only a partial list of the factors to consider.
So What is a Frequent California Visitor (aka, a “snow bird”) of California to do?
First, know the rules for keeping your status as a part-time resident. Snow birds have a presumption of nonresidence if they follow certain guidelines. The total amount of time you spend in California during the year has to be less than 6 months. You can own a vacation home (but it should probably be smaller or of less value than your main out-of-state residence). You’re allowed to have a small local bank account to handle your financial needs related to your stay. Your can have a membership in a local country club. Limit your California contacts to these, and you will probably avoid a lengthy audit, form or no form.
Second, lower your local profile. The State of California doesn’t know you’re here unless you or the financial institutions you deal with let them know. For instance, any interest generated on your local bank account gets reported to the State of California as a form 1099. You can fly under the State of California’s radar by opening a non-interest bearing account. It may cost you a few bucks in interest, but it may avoid an expensive residency audit. Given the ease with which you can access funds across state lines nowadays, it may not even be necessary for you to open a local account.
Similarly, a lot of part-time residents like to have local brokerage accounts. It seems free time and sunshine go together with playing the market. The problem arises when stock in a local account issues dividends, which get reported to the State of California. You should consult your broker concerning ways to avoid this. Again, because of the ease of trading stock nowadays, the broker may be able to hold the stock for you in an out-of-state affiliate of his office, or you can forget about brokers and trade online (you didn’t hear that from me). At the very least, have all brokerage statements sent to your out-of state address. The same is true for bills from all local professional services.