If you move out of California, there are additional steps you may need to take to escape California taxes.
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This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.
Who does California tax?
Under California law, you have California residency and are subject to California state income tax on your entire taxable income if you:
Are in California for other than a temporary or transitory purpose
Are outside of California for a temporary or transitory purpose and remain domiciled in California
Because California has one of the highest state tax rates in the country, individuals often aggressively try to avoid having California residency. The California Franchise Tax Board (FTB) also aggressively tries to prove that people are residents of California.
For example, high-income earners will often try to establish residency in another state, while California will often use any sort of remaining tie to California to prove that they’re still a California resident.
What should you do if you’re permanently leaving California?
If you’re leaving California permanently, the easiest way to break California residency is usually to sever all ties with California as soon as possible.
This includes things like:
Selling your California home
Changing your driver’s license state
Registering your car in the new state
Changing your address on all of your bank accounts
If you’re continuing to work for the same employer, make sure they update your home address and tax information
Updating your voter registration
Enrolling your children in school
Joining local professional associations, canceling California local memberships, and updating your information with national associations
Changing your address with the IRS
Most of these things are normal things to do for people who are moving to another state. The problem is that if you miss a step, like changing the address on your online savings account, it might give California a reason to try to say you’re still a resident.
What if you’re keeping a California home?
If you’re moving to another state but keeping your California home as a second home, you need to be really careful. A lot of California residents try to give up California domicile on paper while still continuing to use their California home as their actual main residence.
California takes a really hard look at people that continue to maintain a physical presence in California.
In addition to taking the usual steps when moving, you’ll want to keep other evidence that your non-California residence is your primary, permanent home. This can include things like proof of where you work, utility bills, and travel records.
What if you intend to return to California?
If you leave California for a temporary or transitory purpose, you can still be considered a California resident even if you don’t maintain a home in California and do things like update your driver’s license to the new state.
There is no fixed amount of time that makes you lose California residency. Instead, California looks at your intent.
If you go on a multi-year rotation to another state for your job but will return at the end of the rotation, you could still be considered a California resident.
If you might want to return to California someday but you take a job that could have you permanently employed outside of California and don’t maintain a physical presence in California, it’s easier to say that you’ve cut your ties to California.
What if you leave California and then return?
California also takes a close look at situations where you leave California and then return later, even if it may not have been your intent to return.
For example, when business owners have given up California residency, sold a business, and then reestablished California residency later, California has said California taxes should apply to the sale of the business.
Whether you left California to avoid high taxes or had another reason to move, talk to an accountant before you return to California to avoid unexpected California tax liability.
What is a California residency audit?
California does residency audits to determine where you actually live. In short, if you say you’re no longer a California resident, California can say prove it.
In a residency audit, you have the burden of proof. That includes showing documentation like that discussed above and explaining any remaining ties to California.
In some cases, California will even do things like subpoena your cellphone company to get your location history. They’re looking to see how much time you actually spent in California.
California doesn’t want to lose tax revenue from people who change their residency status on paper but keep living in California. So you really need to make sure that you understand California residency law and are actually following it.
Does California have an exit tax?
California does not currently have an exit tax. There have been various proposals, such as taxing the net worth of people who leave California or continuing to charge income tax on former California residents for a certain number of years.
These proposals have failed to pass, and some legal scholars believe they may violate the U.S. Constitution and federal law.