California has one of the highest income tax rates in the country. Not surprisingly, many individuals, entrepreneurs, and businesses contemplate changing residence from California to other states so that they can hold onto more of their money. Unfortunately, California is very aggressive in attempting to tax its ex-residents. To avoid California’s tax, you should be aware of two basic rules.
(1) California residents pays California tax on all their income.
(2) California generally taxes California-source income, regardless of a person’s place of residency. A non-Californian will therefore still be taxed on all services performed within California, on rental income from California property, on proceeds from sales of California real estate, and on other types of California source income.
So, who is a resident? In determining residency, California law provides two presumptions. The first presumption is that a taxpayer who, in the aggregate, spends more than 9 months of a taxable year in California will be presumed to be a California resident. The second presumption is that an individual whose presence in California does not exceed 6 months within a taxable year and who maintains a permanent home outside California is not considered a California resident provided the taxpayer does not engage in any activity or conduct within the State other than as a seasonal visitor, tourist, or guest.
The following factors are helpful in planning to establish nonresident status in California. These factors look to the State in which the following occurred:
1. Birth, marriage, raising family;
2. Preparation of tax returns;
3. Resident state income tax returns filed;
4. Payment and receipt of income;
5. Ownership and occupancy of custom built home;
6. Service as officer and employee of business corporation;
7. Holding of licenses for conduct of profession;
8. Ownership of family corporation;
9. Ownership and occupancy of vacation home;
10. Ownership of cemetery lots;
11. Church attendance;
12. Church donations;
13. Church membership and committee participation;
14. Family doctors and dentist;
15. Car registration;
16. Driver’s license of taxpayer year;
17. Driver’s license of taxpayer’s spouse;
18. Voter registration and actual voting;
19. Charge accounts;
20. Predominant banking and financial accounts;
21. Accountant, lawyer and professional advisors;
22. Wills prepared and located;
23. Education of children;
24. Most days within state;
25. Country club membership;
26. Plaintiff’s intended state of residence;
27. Presence of, and visits by, other family members;
28. Social event attendance; and
29. Professional memberships.
If you truly want to establish that you are a non-resident of California, it means that there are a number of steps you can take (such as getting out-of-State driver’s licenses, joining churches and country clubs, and registering to vote) to substantiate the fact that you are not a California resident.