If you are contemplating moving away from California, regardless of the reason, be prepared to prove to the Franchise Tax Board (FTB) that you did indeed relocate and your intention. This could be for work or to be closer to extended family, preferring a different climate, etc.
Whatever you do, do NOT give even the slightest inclination that you moved away from California to avoid the excessively high (13.3 percent) tax rate. The state will absolutely nail you if they suspect a relocation motivated by tax evasion.
Proving that you no longer live in California can be tricky. The FTB will examine every aspect of your life — from your phone records to where you go to church, to where your investment income is seated. That is why it is so critical that you sever any and all ties to California as soon as possible.
In this chapter, we will show you the areas the FTB will look at in order to prove their position that you are still a California resident. We will also spell out what you need to do to systematically and successfully dismantle case point by point.
If you are facing a residency audit or other problems with the FTB involving California residency, give me a call. We have many clients who have moved away from the state, but are still hounded about owing taxes. Let us get the FTB off your back.
What Determines California Residency?
In determining residency, the Franchise Tax Board created a list of what they considered to be the strongest factors of whether or not somebody was intending to change residency. The list is a follows:
- The location of all of the taxpayer’s residential real property, and the approximate sizes and values of each of the residences
- The state where the taxpayer’s spouse and children reside
- The state where the taxpayer’s children attend school
- The state where the taxpayer claims the homeowner’s property tax exemption on a residence
- The taxpayer’s telephone records (i.e., the origination point of taxpayer’s telephone calls)
- The number of days the taxpayer spends in California versus the number of days the taxpayer spends in other states, and the general purpose of such days (i.e., vacation, business, etc.)
- The location where the taxpayer files their tax returns, both federal and state, and the state of residence claimed by the taxpayer on such returns
- The location of the taxpayer’s bank and savings accounts
- The origination point of the taxpayer’s checking account transactions and credit card transactions
- The state where the taxpayer maintains memberships in social, religious, and professional organizations
- The state where the taxpayer registers their automobiles.
- The state where the taxpayer maintains a driver’s license
- The state where the taxpayer maintains voter registration, and the taxpayer’s voting participation history
- The state where the taxpayer obtains professional services, such as doctors, dentists, accountants, and attorneys
- The state where the taxpayer is employed
- The state where the taxpayer maintains or owns business interests
- The state where the taxpayer holds a professional license or licenses
- The state where the taxpayer owns investment real property
- The indications in affidavits from various individuals discussing the taxpayer’s residency
(California State Board of Equalization, Formal Legal Opinion, In re Bragg, Appeal No. 2003-SBE-002.)
If you have substantial real property holdings in California, and you have not yet established those in your new state, it could be perceived that you intend to keep your domicile in California. The state looks at the location of your home and at its value.
They also look at the history of your occupancy and use of the property. A lot of clients, particularly our higher net worth clients, will have homes in multiple states. California will be looking at the pattern of where they are primarily living, for what period of time, why they are making the transition from one residence to another, and the patterns of their spouses and children.
Obviously, in most cases, spouses and children are going to reside in the same place that the taxpayer lives. Where a taxpayer’s spouse and children reside is generally strong evidence that the taxpayer intends to have a domicile in that particular location.
However, that is not always the case. We have situations where the spouses live in two states. We have situations where two spouses live in the same state, but their minor children live in a different state for a valid reason, such as boarding school. Where one’s children attend school is another aspect of the factual determination.
Additionally, for some people who work abroad for most of the year or are traveling to different places for work, California will look at which place you had the most connections with when determining your residency.
In California, issues related to community property often arise for families who have members residing in different jurisdictions. You can technically have a couple who has two different domiciles and two different states of residence.
It is also possible to have more than one domicile within one state, with one spouse per residence, and not the other. Community property issues arise as a result of that. A spouse who may not be the higher income earner in the family, but is a resident of California, will be entitled to one-half of the marital economic community.
California will then seek to tax one-half of the marital economic community, even if the spouse is earning a much higher amount of income in another state.
Another factor is the state where the taxpayer claims a homeowner's property exemption. The state is looking for declarations of, "this is where my primary residence is." California will look at where you are listing or where you are taking the homeowners tax exemption.
Your Phone Records are Fair Game
Another aspect that may be overlooked are your phone records. One of the things that our firm will look at in preparation for a residency audit is the phone calls you make. There are two important things with respect to these phone calls.
First, it is where the phone calls are being made from. We look at where you are located at the time you are making the calls. More importantly, for the purposes of establishing contacts, we look at what percentage of your calls are made to different states.
If you move to Nevada, but you are constantly making phone calls back into California, California is going to look at evidence that you still maintain a very strong connection with the state of California.
Next, is physical presence and the number of days you spend in a particular state. There is a gray area between the number of days that the taxpayer spends in California during any given year, versus any other states, and the general purpose of those days.
If you maintain a primary residence in another state, but are coming back to California for vacation, the vacation aspect or even visiting family is less of a concern than maintaining employment or other factors showing permanence.
However, California will still look at why you are in the state. If your reason for being in California appears to be substantial and important, then the FTB will rule that as a factor against you.
Update Your Address ASAP
The FTB will look at tax returns. A mistake that we see taxpayers or their preparers often make when filing their taxes, is not changing their address on the forms. Even if you moved out of state, your tax return will state your old California address unless you update it.
Or, the taxpayer is still using a California address for mailing. These will weigh in favor of them remaining in California for residency purposes. The state will take a close look at this.
It is very important when preparing your tax returns for any given year, to make sure that they include your new actual address or where you want your domicile to be located. If you own real property in multiple states, you should remember that one of the factors taken into consideration is where you requested property tax exemption.
If you have a vacation home in another jurisdiction — especially if it is one where you were formerly a resident — any connections you have with that state because of your secondary properties will be scrutinized.
It is worth stressing the importance of limiting the use of your vacation homes, rental properties or other secondary properties’ address on important tax filings or other correspondences.
Where do You Bank?
Where are your bank and savings accounts located? When you make a move, the state of California is going to want you to change banks. If you do not, it could weigh against you as the FTB can interpret maintaining banking and financial relationships with California-based institutions as evidence of residency.
The state will often look at the origin point of the taxpayer's checking account and credit card transactions. This includes where one visits the ATM or deposits checks. In a residency audit, the state will go through the taxpayer's physical bank and credit card statements, line-by-line and figure out the geographical origin of those transactions.
The state has come up with a variety of ways to try and put the taxpayer in California. The state looks at whether the taxpayer has a greater frequency of transactions or significant amount of money being spent in California.
This is one of the more important issues with the FTB in a residency audit. From an audit planning perspective, the more documentation you have that confirms your intent to switch addresses, the stronger your case.
In addition to the 19 factors listed above, here are some other factors the FTB will look at:
- The state where you maintain membership in religious, social, or professional organizations
- Evidence that you are establishing business and personal contacts in the new state
- The address on your passport, especially if you have renewed your passport recently
- Your car and homeowner’s insurance policies. Make sure they include your new address.
One thing that you can do which is helpful, is having statements or testimony from other individuals who confirm your residency in another state. These statements can be from family members, friends (particularly new friends), church pastor, employer, or frankly anybody who will weigh in.
Even if that third-party's testimony is hearsay, it will still factor into a residency audit if you ever get in that situation.
Again, all these actions will, in aggregate, be used to determine whether you are a resident for tax purposes. Remember that along with the days you spent in any given jurisdiction, your contacts within that jurisdiction — especially those contacts that are documented — matter to the taxing authorities.
California will put out all stops to insist, that for tax purposes, you live in the state. Even if you move across the country, any ties related to California, such as a vacation home or the simple mistake of having your old address on your tax returns, can be construed as California residency and you may be subject to taxation.
While there may be other factors that you cannot control, such as the residences of your spouse and kids (for people who must, for work or other reasons, live away from their families), where you have investment properties or where you have business contacts, take steps to establish residency so that are in your control. Without proper documentation to back up your residency claims, you will be out of luck.
If you receive notice of a residency audit or are otherwise grappling with the state of California over whether you live there or not, call me. Our firm frequently deals with residency issues and knows how to prove your case to the FTB. Put our experience to work for you.