Articles Tagged with leaving California

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FAQ-300x169Sanger & Manes has decades of experience in advising clients on California residency law, handling residency audits, assisting businesses relocate out of California, and appealing residency determinations. Based on this experience, we have assembled this list of frequently asked questions and provided brief answers.

1.Q. How does California tax residents versus nonresidents?

A. California taxes residents on all their income, from any source, no matter where it is generated. In contrast, nonresidents are only taxed by California on “California-source” income; that is, income generated in California. If a nonresident has no California-source income, then the nonresident should owe no taxes to California.

2.Q. I am a nonresident who owns a California vacation home. If I spend more than 6 months in California, am I automatically a resident?

A. No. There is a lot of mythology on the internet about the “six-month presumption.” While it’s always better from a residency perspective to spend less time in California, spending more than 6 months in California does not make you a resident. In fact, no one thing will ever make you a resident. The test for legal residency is complex and involves many factors. You can spend more than 6 months in California without becoming a resident, but you should plan carefully to make sure an extended stay plus other contacts don’t result in an audit or unfavorable residency determination. See our article, “The Six-Month Presumption In California Residency Law: Not All It’s Cracked Up To Be“.

3.Q. I’ve heard that if I spend more than 9 months in California, I am definitely a California resident. Is that true?

A. California law applies a “nine-month presumption” to visitors. That is, if you spend more than 9 months in California in any tax year, you are presumed to be a resident. But the presumption is rebuttable. Other factors may apply that result in you not being a legal resident, despite the extended stay. Prudence, however, suggests you shouldn’t tempt fate with so long a stay.

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Wave-goodbye-300x300It’s no secret that California has a high state income tax rate.  In fact the Golden State competes with New York and Hawaii for the highest rate in the nation — and usually wins (as of 2017 California is in fact the winner).  Nonetheless, despite somewhat overblown media reports, most Californians aren’t in a position to tear their businesses up by the roots and transplant them to low or zero income tax havens like Nevada and Florida.  Often those businesses have to operate in California, since that’s where the market for the product or service is, and typically for small businesses, the owner has to be present here in-state for the enterprise to operate and grow.

But that’s not always the case, especially when a taxpayer owns numerous entities and some of the income derives from service contracts (usually for management work) among the entities or between the entities and the owner.  Further, as e-commerce continues to grow in market share, a physical presence in California becomes less and less necessary for many businesses.  In cases like this, some strategic use of out-of-state entities can result in large tax savings that might make the major step of relocation worthwhile.

The Rules of California Residency Taxation

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But before we can address the benefits and pitfalls of relocation, we need to first give an overview of California’s income tax system relating to residency. California taxes residents with respect to their “global” income.  This means that for a California resident, income from whatever source — whether in-state or out-of-state — is subject to California taxation.  There may be credits for payment to other states, and there may be other ways of mitigating the taxes due to California.  But leaving that aside, California residents generally must pay significant state income taxes on all the income they make, from whatever source.  Let’s call this Rule #1: taxation of all income based on the California residency of the taxpayer.

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