Changing California Residency for Tax Purposes

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By: Neha Karnwal

Some individuals who reside in California may want to change their state of residence to a state with lower or no taxes to save on their income taxes. But this is not as easy as it may seem. California’s state income tax rules can make it complicated to change from a resident to a nonresident.

Why is Residency Relevant?

All city, county, state, and national governments collect taxes based on residency.

How is California Residency Determined?

While some state governments may define residency differently, it is usually determined based on where a taxpayer has the closest connections. However, California’s definition of residency is more expansive than some other states.

  • Your presence in California for a non-temporary reason could make you a resident in California
  • Your absence from California for “temporary” purpose does not make you a nonresident, if you continue to maintain a California domicile
  • A “domicile” is where your true, fixed, and permanent home is located, and where you intend to return.
  • California’s presence test considers how much time you spend each year in the state:
    • If you spend more than nine months of a taxable year on aggregate in California, you are presumed to be a resident of the state.
  • If you spend fewer than nine months of a taxable year in California, there is no presumption of non-residency.
  • When determining whether you are not a resident of California, state tax law focuses on whether you have:
    • Relinquished your physical California residence, and
    • Truly relocated to another state
  • It is difficult for California residents who leave the state to be classified as nonresidents if they return in the future. Taxpayers must prove upon leaving the state that they:
    • Intend to remain absent, either permanently or indefinitely, and
    • Have severed most social and business ties with the state
  • Safe Harbor for Employment-Related Contracts: If you leave California under an employment-related contract for at least 546 consecutive days, then you will be considered a nonresident for tax purposes. However, you cannot have intangible income over $200,000 during this period of employment.

How Can I Change My Residence from California?

Although it is not impossible to change residency from California to another state, someone must truly relocate, establish their domicile in a new state, and sever ties with California. If you want to become a nonresident, you must truly change your residence, which includes:

Do’s

  • Sell your California home
  • Leave your California employment
  • Establish and spend time in a residence located in the new state
  • Establish business and social ties in the new state
  • Discontinue business and social ties in California

Don’ts:

  • Keep your California home
  • Vote in California elections
  • Have business or personal mail sent to California
  • Continue to use California physicians, dentists, or other professionals who require your physical presence to transact business

What Factors Does California Use to Determine Residency?

The Franchise Tax Board (FTB) considers certain factors when determining your residency status. Since your residence is usually the place where you have the closest ties, you should compare your ties to California with your ties elsewhere. The FTB considers the strength and number of ties to California when examining residency.

Factors include:

  • Amount of time you spend in California versus time you spend outside of the state
    • Location of your spouse/registered domestic partner and children
    • Location of your principal residence
    • State that issued your driver’s license
    • State where your vehicles are registered
    • State in which you maintain your professional licenses
    • State in which you are registered to vote
    • Location of the banks where you maintain accounts
    • The origination point of your financial transactions
    • Location of your medical or healthcare professionals, accountants, or attorneys
    • Location of your social ties, such as your place of worship, professional associations, or social and country clubs of which you are a member.
    • Location of your real property and investments.
    • Permanence of your work assignments in California.

Conclusion

For more information on how to become a California nonresident, or for help optimizing the amount you owe on your business and income taxes, please contact your trusted Chugh CPAs, LLP professional.