Articles Tagged with California Residency Audit

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bumerangue_279140327-300x200It’s no trick to leave California to avoid its high income taxes – if that’s all you want to do.  But in fact, most people who change their legal residency from California have more in mind.  They also want to retain contacts with the state.  That might mean a vacation home, it might be managing a California business remotely, it might involve meeting potential clients or investors in California for an out-of-state entity.  The last situation, which is fairly common, requires planning, since changing residency may not be enough to avoid California income taxes if your work for your out-of-state business brings you back to California.

When Changing Residency Isn’t Enough

A typical situation involves a business owner who changes legal residency and moves his business out of state.  Well and good.  Unless a taxpayer changes legal residency, everything else is moot from a tax perspective, and if the company operates out of California, distributions to its out-of-state owner are also subject to California tax.  But the fact is California is an economic powerhouse.  Few businesses, especially those in high-tech and financial services (which are increasingly the same thing), can succeed without participating in the California market.  And that often means meeting with and cultivating potential clients or investors in Los Angeles or Silicon Valley, where the capital, expertise and demand resides.

If that’s the case, it’s important to understand the differences between personal residency as opposed to doing business in California versus working while present in California.  These are three separate tax issues, which require different approaches to manage. Continue reading →

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2982476-300x225Let’s go over the basics of California residency taxation.  They can be brutal.

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.

Continue reading →