Seasonal Visitors to California and Residency Anxiety
Out-of-state visitors who own vacation homes in California or otherwise spend significant time here on a seasonal basis (traditionally known as “snowbirds” because the season is inevitably winter) are often anxious about their residency status. There’s good reason to be. California rules for determining residency are notoriously difficult to grasp. It’s altogether possible for the innocent actions of a nonresident to trigger a residency audit. And sometimes the audit has a bad outcome, with tax consequences that bite. Let’s go over the basics of how California determines residency for tax purposes. They can be confusing, and sometimes 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 accrued while working out-of-state, California will tax that income. The resident may qualify for a credit for paying taxes to other states, but the default rule is, a resident’s global income is subject to California income tax. Period. With a top bracket rate that is currently the highest in the nation, 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, some obvious, some more subtle. It could be rents derived from California real estate or income from business operations or wages for performing temporary work in-state (obvious). Or it could be a portion of the sales proceeds attributed to a noncompete clause when a founder sells his California business, or the gain from non-statutory stock options vested while the employee worked in California (not obvious). To celebrity name drop, when LeBron James, an Ohio resident, used to play the Lakers at Staples Center for the Cleveland Cavaliers, he paid California taxes on the income he made on game night, which in his case was no small amount. [By the way, now that James signed with the Lakers, he has a different problem: whether he can work for a California employer, train and practice here for a significant part of the year, and still remain a nonresident – the answer is yes, but that’s a different analysis (see, “Nonresidents Working Remotely for California Businesses: How to Take Paul Newman’s ‘The Sting’ Out of Your Taxes“).
So, the stakes can be high when determining whether a taxpayer is a California resident or not.