Trying to Leave California? Maybe Not: An Overview of California Residency Rules
If you intend to leave California and make another state or country your permanent home, avoiding California income taxes may be more difficult than you think. Even if you do not live or earn income in California, you may be held to be a resident of California (or at the very least you may have to prove to California that you are a non-resident). If you file a California income tax return and claim that you are a non-resident of California, The Franchise Tax Board ("FTB") may conduct a residency audit. During this audit, you may be expected to provided (1) records detailng the purchase, sale or lease of real property (2) vehicle and vessel registration (3) Business activity information (such as employment contracts and travel logs) (4) Finacial records (including bank and credit card statements) and (5) records and information about your voting history and which service providers you have retained (i.e. doctors, attorneys, accountants, etc). Furthermore, if you do not file an income tax return in California and the FTB determines that you have some connection with the state of California, the FTB may prepare a proposed assessment of income taxes on your behalf. If, for example, you hold a contractor's license in the state of California but do not live here, the FTB may estimate a reasonable salary for a contractor in California and assess taxes on this salary. Examples of other contacts include: other licenses, owning a home, a vehicle or the payment of mortgage interest in California. Once a proposed assessment has been filed, you must either contact the FTB and convince them that you are not a resident of California or file a nonresident tax return (which could be subject to a residency audit). A successful determination that you are not a resident for one year may not prevent the FTB from preparing a proposed assessment on your behalf for the following year for the same reason. California defines " resident" as "every individual who is in this state for other than a temporary or transitory purpose and every individual domiciled in this state who is outside the state for a temporary or or transitory purpose." The FTB claims that "the underlying theory of residency is that you are a resident of the place where you have the closest connections." The FTB has a list of factors to determine your residency status.
- The amount of time you spend in California versus the amount of time you spend outside of California.
- The state where your spouse and children are located
- the state where your principle residence is located
- The state that issued your driver's license
- The state where your vehicles are registered
- The state where you maintain your professional licenses
- The state where you are registered to vote
- The location of the banks where you maintain accounts
- The origination point of your financial transactions
- The location of your medical professional and other healthcare providers, accountants and attorneys
- The location of your social ties, such as your place of worship, professional associations, social clubs and country clubs where you are a members.
- Location of your real property and investments
- Permanence of your work assignments in California.
What does this mean for you if you have decided to leave California and take up residence in another state or country? This means that you have to substantially sever your connections with California when you leave and establish significant connections with the new state or country. You may not maintain connections in California in readiness for your return. For example, you obtain a job opportunity in Arizona, leave California and move to Arizona on January 24, 2012. Instead of selling your California home, you decide to keep it as a vacation home for when you come visit your grown children and friends. You have an account with a California bank which you do not close. Your driver license does not expire for another three years and you make no effort to cancel it. You also make several trips a year to visit your family and friends in California and, while there, you visit your regular doctor and/or dentist. Under this fact pattern, if you are audited by the FTB, it may be determined that you are a resident of California for the 2012 tax year because you have maintained your connections in California in readiness for your return. (These facts are similar to that of in the Appeal of Nathan H. and Julia M. Juran, where it was determined that Mr. and Mrs. Juran were residents of California). Those who are present in California for a vacation or a business transaction, are not automatically considered residents. Nevertheless, when the visit becomes for other than a temporary or transitory purpose, you become a California resident. This purpose could include being assigned to an office in California for an indefinite period or an indefinite recuperation period from an illness or injury. In addition, being present in California for more than nine months creates a rebuttable presumption that you are a California resident. This is regardless of whether you also have connections with another state and consider yourself a true resident of that state (i.e. your wife and children remain in Arizona). In conclusion, if you intend to leave California, your intent to leave and make another place your permanent home is not enough. Instead, California looks at whether the physical facts demonstrate that you have have relinquished your California residency. Likewise, if you are present in or have contacts with California but consider yourself a resident of another state, you may still have to convince the FTB that you are not a resident and therefore are not subject to California income taxes.