Most Californians believe they are already paying high taxes and they are not wrong. However, a tax return, AB 1253 (Santiago), would levy even higher taxes retrospectively from January 1, 2020. If passed, high-income Californians would pay an additional 1% on incomes over $ 1,181,484, 3% on incomes over $ 2,362,968, and 3.5% on incomes over $ 5,907,420. These dollar thresholds look strange, but they are $ 1 million, $ 2 million, and $ 5 million plus inflation adjustments. You would only meet very high-income Californians and raise California’s tax rate on income over $ 1 million from 13.3% to 14.3%. California’s highest rate would be a whopping 16.8%. You can read Assembly Bill 1253 for yourself. When it’s over, some Californians could jump in their Teslas and head to Texas, Nevada, Washington, or elsewhere. Anywhere would mean lower state taxes. The current high of 13.3%, which is the same in terms of ordinary income and capital gain, is from 2012.
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With the 2018 federal tax law changes, it’s even more painful to pay 13.3% non-deductible state taxes (after a cap of $ 10,000). Moving around sounds easy, but if you’re not careful how you’re doing it, you could leave California and still be asked to continue paying California taxes. California has wide coverage in other states, and in some cases California can set taxes regardless of where you live. Should that discourage you? No, but it’s worth knowing what to expect. If you live in California, you might know how aggressive the California state tax department can be. Even people who live elsewhere have heard of the aggressive tax rules of the Golden State. The California Franchise Tax Board (FTB) closely monitors the border between residents and non-residents. As with other high-tax countries, California will likely investigate how and when you stopped being a resident.
For this reason, be careful even if you think your facts are not controversial. A California resident is a person in the state who does not work temporarily or temporarily. This includes anyone residing in California who is temporarily or temporarily outside the state. Yes, this is confusing and you need to show that you are not a Californian. If you have been in California for more than 9 months, you will be assumed to be a resident. However, if your job requires you to be out of state, it typically takes 18 months to be considered no longer a resident. Your abode is your true permanent home, the place you want to return to even when you are away. Many innocent facts do not appear to be innocent to the California tax authorities.
For example, do you keep a California base in a constant state of readiness for your return? No state has a larger cadre of potential tax evaders year after year than California. Some Californians try to flee the state before selling real estate or a business. Some get the travel itch right before cashing in for stocks, a public offering, or settling a dispute. Some of the carefully coordinated deals and moves can work well. However, many aspiring former Californians have unrealistic expectations of establishing a residence in a new state. They may find it difficult to distance themselves from California and they may not plan for the California tax authorities to prosecute them. These rules are unforgiving, and when battling California tax bills, the process counts.
You can only have one residence. It depends on your intent, but objective facts can affect it. Start with where you own a house. Where your spouse and children live counts, as does the place where your children go to school. Your days in and out of state are important, as is the purpose of your travel. It is also relevant where you have bank accounts and belong to social, religious, professional and other organizations. Voter registration, vehicle registration, and driver’s licenses count. Where you are busy is key. You might be a California resident even if you travel a lot and are rarely in the state. Where you own or operate businesses is just as relevant as relative income and the time you devote to them. Taxpayers with unrealistic expectations can face huge bills for taxes, interest and penalties.
Your exam risk can also be daunting. The IRS can examine 3 or 6 years, but California can sometimes examine forever. Various things can give the FTB an unlimited amount of time to examine you. California, like the IRS, has unlimited time if you never file an income tax return. You could claim that you are no longer a resident and you don’t have a California registration requirement. The FTB can disagree. This can make filing a non-resident tax return – just reporting your California income as a non-resident – taking the right facts into a smart move.