Leaving California and the Franchise Tax Board Behind: A Little Q&A on California Exit Planning

Individuals and businesses alike are leaving California to take advantage of lower taxes, lower labor costs, more affordable living, and less stringent regulations elsewhere. If you are part of this exodus, it is important to plan your move carefully so that the State of California has no reason to continue treating you as a resident for tax purposes.

Following are some questions our clients have been asking about California exit planning:

Q: I am planning to move away from California this summer. Do I need to continue paying state income tax?

A: It depends. Many taxpayers are under the impression that all they need to do is move out of state and they will no longer be subject to California state income tax. This misunderstanding puts many people at risk of unexpected tax assessments and Franchise Tax Board (FTB) penalties. In fact, there is a long list of factors that may keep you tied to the state for tax purposes even after you leave.

Q: What is a California “resident” for tax purposes?

A: Per the California Revenue and Taxation Code Section 17014(a) tax residency rules, you are considered a resident of the state if you are in California for other than a temporary or transitory purpose, or you are domiciled outside the state for a temporary or transitory purpose. A careful analysis of your particular circumstances is required to make this determination.

Q: How does the FTB determine whether or not I still reside in the state for tax purposes?

A: To determine residency, the FTB uses the “closest connection test” which involves evaluating the following 19 factors to determine the location of your main contacts:

  1. The location of your largest and most expensive residential real property
  2. Where your spouse and children live
  3. Where your children attend school
  4. Where you claim your homeowners property tax exemption
  5. Where most of your phone calls are made from
  6. The number of days you spend in California as opposed to the number of days you spend elsewhere (and why you spend your time here or there, e.g., business or pleasure)
  7. Where you file your federal and state tax returns, and what address you list as your residence on those returns
  8. The location of your bank accounts
  9. The origination point of your checking and credit card transactions
  10. Where you maintain your social, religious and professional memberships
  11. Where you register your automobile(s)
  12. The state that issued your driver’s license
  13. The state where you vote
  14. Where your doctor, dentist, accountant, and attorney is located
  15. Where you are employed
  16. Where your business is located
  17. The state in which you hold your professional license(s)
  18. The location of your investment real property
  19. Affidavits from individuals discussing your residency

Q: What if only one or two of those factors point to California? Does that establish California income tax residency?

A: None of these factors alone will determine whether or not you are a California resident, except that claiming the California homeowner’s exemption (#4) or being registered to vote here (#13) could be determinative. As a general rule, the California Franchise Tax Board (FTB) compares all of the factors, weighing some more than others.

Q: What if I move out-of-state, but leave some of my stuff in a California storage facility and/or rent out my house?

A: You are considered to reside in the place where you intend to return even after a lengthy absence. If you keep your stuff and/or a California house ready for you in case you come back, this shows that you may have left only for a temporary reason and that you still consider California to be your permanent home.

Q: How long will the state presume that I am still a resident after I leave?

A: You are generally presumed to be a California resident for a period of 18 months after you leave the state.

Q: What if I move to another state, but work remotely as an employee of a California business?

A: The FTB may attempt for some time to make you file a California resident return based on any California connection – you are the one with the burden of proving that you are no longer a California resident. If you still have ties to the State of California per the above-listed 19 factors or others, you should be prepared to defend yourself.

Once you establish sufficient connections elsewhere you will be able to file a nonresident California income tax return that will include your California-source income.

Q: Do the 19 factors apply even for people who have never been California residents?

A: Yes, they do. The FTB is very aggressive in finding ways to impose taxes. Failure to take California non-resident tax into consideration can be costly. Even if the state loses its case, your legal and accounting costs may be significant.

Filing California exit tax returns

For assistance with exit planning, California resident- and non-resident tax returns, audits, tax investigations, collections, and tax litigation, contact the attorneys and accountants at the full service San Francisco, California tax firm of Moskowitz, LLP today.