It’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