You loaded the moving truck, changed your driver's license, bought a new voting registration in a new state, and swore you would never pay another California tax bill. However, some years on, a letter is received by the Franchise Tax Board (FTB). They desire to inspect your living. And then suddenly, the liberation that you believed you received is being challenged.
California is vigorously auditing its residents that relocated out of state. And when the FTB finds that you did not, in fact, leave, they can tax your global income, including the income you made in Texas, Florida, or any other place on the planet. Always try to be in contact with an expert (like an IRS tax lawyer in San Rafael CA) for additional help.
The myth around Exit taxes in California
First, this is the point that must be made clear: California has no official exit tax. You do not write a cheque just because you move. The FTB instead applies a legal concept of domicile to establish your continued taxation by California.
In the case that the FTB concludes that your domicile is still California, i.e., they consider your relocation to be temporary or your ties here are stronger than elsewhere, they will consider you as a resident for tax purposes. That is, you pay California income tax on all money, irrespective of where the money was earned.
What is a close connection test?
The FTB is not dependent on one factor. They instead use a close connection test to compare your California allegiance to your connection to your new state. It is upon yourself to demonstrate that you departed.
Key aspects that FTB investigates:
a. Family location: In case your spouse or children stay in California, then the FTB will claim that you never left.
b. Physical presence: Residency presumption may be a result of spending over 183 days in California within any tax year.
c. Business connections: The ownership or control of a California-based business without a separation.
d. Professional licenses: Having a California professional license (medical, legal, or real estate) with no similar one in your new state.
e. Social networks: The remaining membership in California clubs, churches, or organizations.
Secondary "gotcha" factors:
1. Having a safe deposit box in California.
2. Having a mailing address or PO box in California.
3. Maintaining voter registration in California.
4. Hiring California physicians or dentists.
Learn about the stakes
Failure to pass the close connection test is disastrous. The State of California will not charge your foreign income, which is your worldwide income, including your salary, investment gains, business earnings, and retirement benefits, as though you never left.
To high-income earners in a zero-income-tax state such as Nevada or Washington, it can cost tens and even hundreds of thousands of dollars to move to a place to which you no longer provide any services. Talking to a professional (like a tax attorney in Marina Del Rey) will surely help you choose the right path.
How to survive an audit?
Proactive documentation is your sole defense in case you have relocated or intend to relocate. The following is the way to construct a bulletproof case:
1. Sever ties completely
Resend California voter registration, driving license, and professional affiliations. Move vehicle registrations instantly.
2. Establish new domicile
Register to vote, get a new driver's license, and lease or buy a place on your first day in your new state.
3. Track your days
Keep a current travel diary that indicates that you have not spent over 183 days in California. Show a verifiable record by using a digital calendar or apps.
4. Avoid "stringing out" the move
The FTB examines transactions that are made over a time span of years. It is more difficult to defend a temporary break than a clean one.
5. Document intent
Make documentation of how you have also joined community organizations, identified local medical providers, and registered children in schools in your new state.
California is going in the direction of residency audits, and it can be disastrous to lose. In case you have moved or you intend to move, approach your move legally. Record all this, cut all the ties, and contact a tax expert dealing in issues of residence before the FTB knocks on us.
Comments
Log in or sign up to join the conversation.