Are you considering moving out of California? You are not alone. An estimated 135,600 more people left the state than moved here in 2020. It’s only the 12th time since 1900 that California has experienced a net migration loss, and the third-largest ever recorded.
Why are people deciding to leave? High taxes, cost-of-living, and affordable housing are among the most popular reasons. With the pandemic, people are really thinking about improving their quality of life. States like California and New York have slowly positioned themselves as states with high-income tax rates and a not-so-business friendly environment.
California is also considering a “wealth tax” on residents, part-year residents, and any person who spends more than 60 days inside the state’s borders in a single year. The wealth tax would be 0.4% on those with a worldwide net worth of over $30M, and the percentage taxed would decline during a 10-year tail should the taxpayer leave the state. Wow.
As everybody already knows, California also has the highest state income tax rates in the country. For those within the highest tax bracket, you can expect to pay 13.3% at the margin.
Top State Marginal Individual Income Tax Rates, 2021
Source: Tax Foundation | *State has a flat income tax | **State only has interest and dividend income tax
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 in 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 2020 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. Situations where you may have relocated due to COVID-19 make it only more complicated, and a tax professional should be consulted during this process.
Establishing Residency in Another State
Bottom line, 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 a good starting point for establishing your residency outside of California when you make the move. Make sure to visit your new state’s tax board website for additional details on steps you need to take to establish residency.
Checklist for Establishing Residency in Another State
- Find a home in your new state to establish permanent residency. You will need an actual physical address (P.O. Boxes do not count for this)
- Depending on the state you are moving to, you may need to complete a “Declaration of Domicile” document
- Obtain a driver’s license from your new state
- Register your vehicle in your new state
- Update your voter registration to your new state
- Ensure that both your physical and mailing address is updated on all bank, insurance, investment, and employer records
- Establish accounts with utility providers using your new permanent address and schedule turn-on dates.
- Register your children for school
- Find healthcare providers in your new state
- Register any pets in your new state
- Any professional licenses should be registered and updated accordingly
- Establish yourself in social circles in your new state (i.e., professional groups, places of worship, local clubs, volunteer organizations, etc.)
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.