Are you considering moving out of California? You are not alone. California’s population decreased by 358,662 in 2021 and 113,649 in 2022. Both are unprecedented numbers and the first time in recorded history that California’s population has declined.
Why are people deciding to leave? High taxes, cost of living, political friction, and affordable housing are among the most popular reasons. In short, people are moving to improve their quality of life, whatever their reason might be. States like California and New York have slowly positioned themselves as states with high-income tax rates and a not-so-business-friendly environment.
As everybody already knows, California also has an extremely high-income tax rate. For those within the highest tax bracket, you can expect to pay 13.3% at the margin.
However, when one considers local taxes, California is not the most expensive in the country. New York has the honors with Oregon taking second place.
No wonder why so many people are leaving high-income tax states. However, simply moving out of California will not break you from the chains that tie you to the state. There are specific steps you must take to no longer be considered a California Resident.
What makes you a California Resident?
According to the Franchise Tax Board (FTB), you are a resident of California if you are either “present in California for other than a temporary or transitory purpose or domiciled in California, but outside California for a temporary or transitory purpose.”
This means that while time is still a factor (the more time you spend in California, the more likely you are to be considered a resident), the purpose or intent of time spent in California is also considered.
California does not use a specific amount of time spent in the state to determine whether or not you are a resident. If you are using the old “less than 6 months” measurement, this may not suffice.
It was noted that for 2022 if you were physically present in California for at least nine months, you are presumed to be a resident for personal income tax purposes. Instead, the FTB applies the theory your residency is the place where you have the closest connections. As such, when you are determining what state you are a resident in, you will want to look at the strength, not just the number, of your ties with California versus your ties with another state. Below are what we consider to be the most important factors when considering your residency:
- Amount of time spent in California compared to the amount of time spent outside of California
- Location of your principal residence
- Location of a spouse or registered domestic partner and children
- State that issued your driver’s license
- State your vehicles are registered in
- State professional licenses are maintained in
- State you are registered to vote in
- Origination point of financial transactions
- Location of medical professionals and other healthcare providers
For a complete breakdown of California’s guidelines on residency, please refer to the FTB’s guide.
Can my income be taxed by California after leaving?
California residents are required to pay taxes on all income, including income from sources outside of California. If you are a non-resident, you will only be taxed on income from California sources.
If you are a part-year resident of California, you can expect to be taxed on the income you received while you were a resident and the income received from California sources while being a non-resident.
Unfortunately, this means that if you are now working remotely and have decided to move out of California, you are still subject to California income taxes if your employer is California-based.
Determining residency and income can be tricky. A tax professional should be consulted during this process.
Establishing Residency in Another State
If you plan to move out of California, you don’t want to find yourself in a situation where residency has not been correctly established, and you are still subject to California income taxes. While rules for establishing residency change from state to state, this checklist can be an excellent starting point for establishing your residency outside of California when you make the move.
Establishing permanent residency in a new state involves securing a physical home, updating key documents such as driver’s license, vehicle and voter registration, as well as transferring personal records including bank, IRS, and USPS details. Make sure to visit your new state’s tax board website for additional details on the steps you need to take to establish residency.
We have created a 12-point checklist to help you ensure that you establish residency outside of California. Download this form below.
As with any critical decision that can significantly impact your tax status, we recommend that you reach out to your tax professional before making such a move.
Also, if you have any questions about how a lower tax rate and cost of living can impact your financial plan, please feel free to reach out to us to see if we can help.