One of the most beautiful places to live in the United States is California. However, last November 2012, Proposition 30 was passed resulting in California having the nation's highest marginal income tax rate at 13.3 percent for those with taxable incomes of $1 million and above.
This income tax rate increase has many taxpayers wondering if they should move out of the state. Just this past January, professional golfer, Phil Mickelson commented about “possibly leaving California because he pays so much in taxes.”
Because California residents are taxed upon their entire taxable income regardless of source, the attraction of relocating to a state with a lower tax rate is becoming more and more appealing. This article discusses some of the issues which need to be considered when moving out of California.
An individual may be a California resident in one of two ways:
- the individual is in the state for other than a temporary or transitory purpose; or
- (ii) the individual is domiciled in the state, but is outside of the state for a temporary or transitory purpose.
The California Court of Appeal and the Franchise Tax Board’s regulations define “domicile” as the location where a person has the most settled and permanent connection, and the place to which a person intends to return when absent.
The residency regulation provides that an individual who is domiciled in California and leaves the state retains his or her California domicile as long as there is a definite intention of returning to California, regardless of the length of time or the reasons why he or she is absent from the state. An individual loses his or her California domicile, however, the moment he or she abandons any intention of returning to California and locates elsewhere with the intention of remaining there indefinitely.
Below are some factors which the taxing authorities consider when confirming a taxpayer has permanently abandoned their California residency:
- The state wherein the taxpayer maintains a driver’s license
- The address the taxpayers uses on his tax returns
- The state wherein the taxpayer registers his automobiles
- The state wherein the taxpayer claims the homeowner’s property tax exemption on a residence
- The state wherein the taxpayer maintains voter registration and the taxpayer’s voting participation history
- The state wherein the taxpayer’s children attend school
- The location of the taxpayer’s bank and savings account
- The state wherein the taxpayer maintains memberships in social, religious, and professional organizations
- The state wherein the taxpayer obtains professional services, such as doctors, dentists, accountants and attorneys
- The state wherein the taxpayer is employed
- The state wherein the taxpayer maintains or owns business interests
- The state wherein the taxpayer holds a professional license or licenses
- The state wherein the taxpayer owns investment real property
The question of “when” a taxpayer abandons their California domicile is a facts and circumstances test. It is uncommon for a taxpayer to leave California on the last day of the year. Therefore, a part- year California tax return is required to be filed for the portion of the year a taxpayer resides in the state.
An increased number of part-year tax return filings may lead to increased residency audits by the California taxing authorities. By taking the proper measures as discussed in this article, taxpayer’s can successfully prevail in the event their tax return is selected for audit.
Please don’t hesitate to reach out to a Marcum LLP professional if you need assistance with this matter.