Moving from CA

Author: Wendy Klein CPA Professional Corporation |

Blog by Wendy Klein CPA Professional Corporation

With so many people and businesses moving out of California recently, making sure where you will be considered a resident for tax purposes is critical. Each state involved will want to treat you as taxable in their jurisdiction. California is especially aggressive in trying to retain its residents, at least for tax purposes. The following is a helpful list to keep in mind when determining where you are considered a resident for California. It is based a lot on the facts and circumstances of your individual situation but is a good roadmap of what to do and when, and it can be applied in very general terms whenever you are moving from one state to another.

  1. You must break meaningful ties with California.
    It is not enough to build new ties with another state if your ties with California do not decrease significantly. If you are a California resident/domiciliary, it will be presumed you continue to be a California resident/domiciliary, and you need to overcome that presumption. For example, keeping the family home in California, the business office in California, and/or continuing to use long-time professionals (doctors, hairdressers, veterinarians, etc) in California.
  2. You must build solid new ties with another state that is, at a bare minimum, comparable to the ties you had in California.
    It is not enough to break California ties if you do not reestablish yourself permanently somewhere else. The analysis in an audit by the FTB is going to be California ties versus ties to a single new state where residence/domicile is claimed. For example, if you spend 40% of your time in California, 30% in the new state, and 30% travelling and in miscellaneous other states, that is not a strong factual scenario, even though you spend less time in California than elsewhere in total. Other factors to take into account – where you register to vote, where you receive mail, where your kids attend school, where is your driver’s license issued to name a few.
  3. The times you do return to California after the move need a solid case for being for a temporary or transitory purpose.
    You can become a resident/domiciliary of another state and still spend time in California as long as that time in California is for a temporary or transitory purpose. Going to California to visit family, for vacations, for business trips, for a course of medical treatment, etc., should all be fine as a nonresident as long as they are carefully managed and fall within that standard.
  4. Watch the timing of the change.
    It is one thing to move out of California and successfully change your residency/domicile to another state. But precisely when did that change take place? For example, buying a home in Nevada on July 1 and having a large income realization event on September 1 will accomplish nothing in terms of changing your California tax situation if the FTB on audit agrees that you moved from California to Nevada, but that the date of the move is October 1 when all factors are taken into consideration. Although one is perfectly free under the law to change their residence/domicile to achieve tax savings, remember that auditors often take a dim view of changes that are claimed to occur very soon before a large income event, often resulting in a tougher burden to show a genuine move took place. Pick your move date carefully.
  5. Carefully consider and understand if there is income that has a California source, a change of residency will not keep that income from being taxed by the FTB.
    For instance, stock options that vested while a California resident, rent from California real property, and income from passthrough entities that have a California source are all taxable to a nonresident of California. It is very common for the FTB to take alternative positions in residency audits, i.e., the individual is still a California resident, but even if they became a nonresident, some/all of the income is still taxable because it has a California source.
  6. California has a four-year period to audit after the filing of the return.
    (R&TC §19057) For example, assume you move in Year 1, but in Years 2 and 3 you begin to spend significantly more time back in California. If you are audited during Year 3 (or 4) for the change of residency/domicile in Year 1, it is extremely likely that your conduct in Years 2 and 3 (or 4) is going to be examined as part of that audit, even if the audit is technically only for Year 1. (It is also likely those later years will be added to the audit.) That is because the FTB may see subsequent conduct reflecting on prior conduct, i.e., maybe you really did not move in Year 1 after all, if you increased your ties back to California in the immediate subsequent years.
  7. Watch for different treatment of spouses.
    It is possible, although not frequent, that spouses may have different residences/domiciles, either as filed or as a result of audit. If this is the case, keep in mind that community property must be divided between them. (Appeal of Misskelley (May 8, 1984) 84-SBE-077)
  8. Be prepared for an audit. Then be pleasantly surprised if it does not happen.
    The larger the potential tax effect from a change on audit, the more likely the audit because of the way the FTB allocates audit resources. Much of the audit selection process is done by computer programs. A California resident who moves and then stops filing returns (i.e., not filing nonresident returns to report California-source income) might generate audit interest, especially involving a high wealth individual. A part-year return that shows a move during a calendar year might generate audit interest. A subsequent nonresident return that shows large amounts of income but with little of it reported to California is very likely to generate audit interest. Remember also that for tax years in which no return is filed, the FTB has an open, unlimited, period in which to audit and assess a deficiency.
  9. Do your best to document your case contemporaneous with the move.
    The FTB prefers contemporaneous documentation as opposed to documentation created at a later time, e.g., at audit. So try to give the FTB what it wants. However, there is no legal requirement for the documentation to be contemporaneous and it is common practice to obtain affidavits/declarations from the taxpayer, his or her friends, employers, or business associates in responses to issues raised by the FTB at audit. (18 Cal.Code Regs. §17014(d)(1))
  10. Need to balance tax concerns with “life” concerns.
    Taxes are simply an expense that is a part of life, so maintain perspective. For example, do you really want to give up your family doctor (or specialist) in California whom you have seen for 20-plus years to start a new relationship with a new doctor elsewhere, simply because it might incrementally strengthen to some degree your argument that you moved out of California? Choosing the best tax-driven decision may not be the same as the best life-driven decision.

Article credit: Spidell Publishing