Leaving California doesn't automatically alter your tax residency. If you're absent for a temporary or transitory purpose, for instance, for a short-term job assignment, you're still a California resident with obligations to report worldwide income. However, extended absences under employment-related contracts, specifically for at least 546 consecutive days, can shift your residency status, assuming you meet the safe harbor criteria outlined previously.
Real-Life Examples:
Leaving for Nevada but keeping ties in California: Declaring yourself a Nevada resident while maintaining significant connections (home, social, and business) to California likely means you're still a California resident for tax purposes. Your declaration alone doesn't dictate residency; your closest connections do.
Working temporarily in South America: Staying abroad for work while your family remains in California and intending to return keeps your residency status intact. Your worldwide income, including earnings from abroad, remains taxable by California.
Permanent move to Spain: Selling your home in California and severing ties indicates a clear change of residency. You become a nonresident from the day you move, shifting your tax obligations only to income sourced from California.
Temporary assignment in Saudi Arabia: Keeping your home, bank accounts, and political ties in California during your period and returning post-assignment maintains your California residency status.
Three-year job in Japan with continuous ties to California: Meeting the safe harbor criteria (absence for employment, no significant income source from California, and short visits back home) changes your status to a nonresident during the absence.
Income Taxable by California
Understanding how different types of income are taxed based on your residency is crucial:
Residents: Taxed on all income, irrespective of the source.
Nonresidents: Taxed only on income from California sources.
Part-year Residents: Taxed on all income while a resident and only on California-sourced income as a nonresident.
Key Income Categories:
Wages and Salaries: Taxed based on where the work is performed.
Interest and Dividends: Typically taxed based on residency but see exceptions for accounts used in a business in California.
Business Income: Nonresidents pay taxes on trade or business conducted in California. Apportionment rules apply for businesses operating in multiple states.
Pensions and Annuities: Distributions received post-1995 by nonresidents from employer-sponsored plans aren't taxed by California.
Example: A former California resident receiving a pension after moving permanently to New Mexico isn't taxed on those distributions by California.
Sale of Real Estate: Taxed based on the location of the property. A nonresident selling California real estate must pay California tax on the gain.
Special Consideration for Changing Residency
Residency changes during the taxable year necessitate split-year treatment. Income and deductions are allocated based on your residency status at the time of earning or incurring those amounts.
Wrapping Up: Your Residency Determines Your Tax Obligation
Whether you're planning to leave California or already have, it's essential to understand how your residency status impacts your tax obligations. Continuing ties with California can maintain your residency status, affecting your tax liabilities. Each type of income—whether salaries, business revenues, or capital gains—has specific rules based on your residency status at the time of receipt.
Moving Forward:
Plan carefully if contemplating a move out of state, considering the potential tax implications.
Keep detailed records of your move, establishment of new residency, and severance of ties with California.
Consult with a tax professional for personalized advice, especially for complex scenarios or significant financial decisions.
By understanding the nuances of California's tax residency rules and planning accordingly, you can ensure compliance and potentially optimize your tax situation in the face of a move.
This extended guide aims to provide a comprehensive overview of tax residency implications when leaving California, tailored to enhance your understanding and help in planning your next steps. For specific advice or scenarios not covered here, seeking our professional consultation is always recommended.