The state of California is “tax happy,” in other words, they need to collect as much tax as possible and will seek any and every opportunity to seize tax revenue. This presents a problem for California residents who live outside of the state for part of the year, or who are leaving the state for good.
If you are in that situation, then you need to decide what your status truly is. Are you a resident of California or not? Often, that is not easy to sort out. Maybe you are retiring and want to move away. Maybe you have to relocate to another state for your job to open a new branch, but you plan to return.
In the eyes of the state, specifically the Franchise Tax Board (FTB), which administers California’s state income tax program, if you are living in California for a specific period of time, then you need to pay your share of taxes for the privilege of living there.
The best way to prevent a residency audit of being unnecessarily taxed, come talk to me. We have first-hand experience with the many circumstances Californians face regarding residency issues. We will review your case and recommend which status works in your favor.
Temporary and Transitory Residency
What are temporary or transitory purposes? The length of time is not the only factor of determination. Think of short or project-oriented stays in the state such as a particular transaction, contract, or a vacation.
The determination of whether a taxpayer’s purpose in leaving California is temporary or transitory in nature will be determined through examining all the circumstances of each particular case.
Here are some examples that we often come across in our practice:
- People who change locations for retirement purposes
- People who are exiting companies, transitioning jobs, or taking a new job in another location
- Family issues such as divorces, where one ex-spouse leaves the state
- A partner or spouse dies, and the one left behind moves away
California often puts up some barriers because it wants to prevent people from stating, “I'm no longer a resident of California.” The state often considers your domicile to be your anchor. Once that is established, they review your presence outside the state and determine the purpose of that.
In this area, nobody has a crystal ball. There are times when we have encountered situations where a client plans to move out of the state.
If you ask them whether their intention is to leave for good, the typical response is, "Yes, I am leaving California, and I am never, ever coming back." Then, things happen and/or they find out they were happier in California, and they make their way back.
This does not necessarily bar you from saying that you are not a resident of California, but it does create some challenges within law. The purpose of these rules from a policy perspective is to get as many people who are receiving benefits from California into the taxpaying system as possible.
Are You a California Resident or Not?
When it is determined that a taxpayer is domiciled in California, they will be considered a resident if their absence is for temporary or transitory purposes. If you maintain a house in San Diego, and you leave the state to take a six-month work assignment, that would likely be considered a temporary or transitory purpose. The question of what is a temporary or transitory purpose is not a legal question definitively answered. It is a question of facts.
To determine the answer, we must make a factual analysis, taking into consideration all of the relevant circumstances. This is important to know because there is not much certainty to provide in this area, even if you are cautious. It is based on a variety of factors, and it is a balancing act.
Our experience dealing with the FTB has gone in a number of different directions on the issue of residency. Because it's a fact-based evaluation, the planning work that we do from a law firm perspective is mainly about preparing our client to succeed in making this transition.
We prepare them for any potential challenges and take a number of actions to help sever their residency.
Who do You Pay Taxes to?
Theoretically, residency is determining which state a taxpayer or person has the closest connection to during the taxable year in question. For somebody who is living in multiple states or a new state during the year, California and the FTB will look at which state is the taxpayer “closer” to. This is an important concept for a variety of reasons.
Another important factor to consider about residency is that a taxpayer can only have one domicile at a time. You can be a resident of only one state or even multiple states, but you can only have one domicile.
In regard to multiple residency, each state will make a decision on which state you are a resident of based on its factors. You may have factors on each side that would establish your residency in a particular state in question. You may also sever your residency with a state in the middle of a tax year for a particular purpose.
When you file your taxes, you are going to have to select a state of residence. Most people choose just one. If you do not pick California, then California might try and challenge that.
California likes to collect taxes, no argument there. The issue is, if you do not live in California full-time, how much tax are you liable for? If your time outside of California is only for a limited time, do you still owe?
These types of situations are complicated because each case is very different. There are guidelines, but they cannot be applied unilaterally. Basically, it comes down to how long you live in California and if you left the state, either for several months or permanently, why?
The bottom line, which bears repeating, is that nobody gets a free ride in California. If you live there for any period of time, then you need to pay. If you need clarification as to your residency status in California, give me a call. We have resolved situations like this for many of our clients and can do the same for you.