California Residency Tax Planning
We next start a detailed series on the consequences of, and how to avoid, being deemed a California state resident for state income tax purposes. We will track this discussion on our Canadian Snowbird blog.
General Rules on California State Taxes
Let’s start with some general principles of California state taxation:
Residents of California– are taxed on ALL income, including income from sources outside California. A California resident is any individual who meets any of the following:
• Present in California for other than a temporary or transitory purpose.
• Domiciled in California, but outside California for a temporary or transitory purpose.
Domicile means the place where you voluntarily establish yourself and family, not merely for a special or limited purpose, but with a present intention of making it your true, fixed, permanent home and principal establishment. It is the place where, whenever you are absent, you intend to return.
Nonresidents of California– are taxed only on income from California sources. A nonresident is any individual who is not a resident.
Part-year residents of California– are taxed on all income received while a resident and only on income from California sources while a nonresident. A part-year resident is any individual who is a California resident for part of the year and a nonresident for part of the year.
California Has a High State Income Tax
Individuals from other states and other countries will want to avoid being deemed a California State Tax Resident. Why? Because California state taxes are not low. For 2102, the highest rate of tax (for individuals earning over $98,000 approximately) is 9.3%. That’s in addition to the federal income taxes (with a high rate of 35%). So this is a high state income tax, no question.
How Does the FTB (the California Franchise Tax Board) Determine Whether an Individual is a California Tax Resident?
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.
Factors to consider are as follows:
• 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.
So a determination of residency, at first instance, is a balancing test. Again, not all factors are created equally. A job or real estate ownership indicates a closer tie than merely enjoying a country club membership.
There’s a lot more to discuss regarding California income tax, including how nonresidents are subject to tax on their California source income, in our next post….