What Is California Source Income?

California nonresidents are subject to California state income tax on their California-source income.

The State of California taxes its residents on all of their income, including income acquired from sources outside the state. Nonresidents are also subject to California income tax, but only on their California-source income. The California Franchise Tax Board (FTB) is aggressive in pursuing its taxes and routinely audits individuals with California ties who claim residency in another state. In this post, we discuss just how far the state can cast its net.

How does California determine residency for tax purposes?

The state’s definition of residency is very broad, and the Franchise Tax Board (FTB) looks to 19 factors to determine whether our state is the one in which you maintain the “closest connection.” These factors include (but are not limited to): where you spend the majority of your time; which state issued your current driver’s license; where you are tegistered to vote; where you earn your income; and your personal connections such as your primary doctor, country club, and church.

If you have left the state
and are no longer considered a California resident for tax purposes (or never lived here at all yet have financial ties to the state), you are still subject to California state income tax on income which is derived from California sources, aka your “California source-income.” California Revenue and Taxation Code § 17951.

What is California source-income?

FTB Publication 1031 provides guidelines on the California nonresident tax rules:

  • Wages and salaries. Wages and salaries for services performed in California, regardless of the location of the employer or the employee (or where the payment was issued), are taxable to nonresidents.
  • Community property income. If your spouse is a California resident, their income is considered community property and is split equally between the two of you. Your community property share of that income is taxable to you in California even if you have never lived nor worked in the state.
  • Business income. Nonresidents may be taxed on any income from a business, trade or profession that is carried out in the state. In addition, income from partnerships, S-Corporations and trusts are taxed to nonresidents if it comes from sources within the state. If you are a nonresident with a business, trade, or profession that conducts business both within and outside California, the income generated from business you conduct within California is California source-income and is taxable in the state.
  • Real estate sales. The source of any gain or loss from the sale of real estate is the state in which the property is located. California therefore taxes nonresidents on gains from the sale of their California real estate.
  • Stocks and bonds. Gains and losses from stocks and bonds have a source where you reside at the time of the sale. If you are a nonresident, you will not pay California tax on income from stocks, bonds, notes, or other intangible personal property unless (1) the property has its business situs in California (meaning, it is located by here by law), or (2) you regularly, systematically, and continuously buy and sell such property in the State of California. California Revenue and Tax Code §17952.
  • Retirement income. In accordance with federal law, the State of California does not tax retirement income received by a California nonresident after December 31, 1995. This includes, but is not limited to: IRA distributions, SEPs, Keoghs, Roth IRAs, and qualified annuities.

Part-year residents

If you were a California resident for part of the year, you will be taxed in California on all income that you received while a resident of the state, and only on your California source-income for the period of time that you were a nonresident.

Credit for taxes paid in another state

California residents can get credit on their California state tax return for taxes they paid in most other states. Nonresidents generally take the credit for their California taxes on the tax return of their state of residence. Check with your tax attorney or accountant to see if a state tax credit is available to you.

California tax advice

We have found that many taxpayers who do not reside in California are surprised to find themselves liable for California state income taxes. If you are planning to leave California, are coming here on a temporary basis, or expect to obtain California source-income, contact our San Francisco office for a consultation.