Are you a California resident who is tired of paying high-income taxes? You’re not alone! California has one of the highest state income tax rates of up to 13.30% in the country. Have you considered moving to a different state to save money on income taxes? If so, there are several things you need to do to disconnect from California effectively.
Residency audits are the Franchise Tax Board’s (FTB) bread and butter. Moreover, the FTB is extremely tenacious about these audits. So, if you plan to leave California for a different state, assume you will be audited, keep great records, and ensure the closest connection ties in your new domicile vs. your old one in California.
The law for determining California residency is both simple and complex. The simplicity comes from residency in the California Revenue and Taxation Code in 32 words. Yet, beyond these 32 words, standards and bright-line tests are nearly non-existent.
Domicile vs. Residency
Domicile and residence do not mean the same thing as far as the State of California is concerned. While many states consider domicile and residence to be the same, they are not the same in California. According to FTB, domicile is defined for tax purposes as the place where you voluntarily establish yourself and family, not merely for a special or limited purpose, but with a present intention of making it your true, fixed, permanent home and principal establishment. It is the place where you intend to return whenever you are absent.
You can only have one domicile at a time but can have multiple residences simultaneously. Once you acquire a domicile, you retain that domicile until you acquire another. A change in domicile requires the following:
- Abandonment of your prior domicile
- Physically moving to and residing in the new locality.
- Intent to remain in the new locality permanently or indefinitely, as demonstrated by your actions.
Bragg Factors & Closest Connections Test
The theory of residency is that you are a resident of the place where you have the closest connections. Therefore, it would be best to compare your ties to California with your ties elsewhere. In using these factors, the strength of your ties, not just the number of ties, determine your residency. These factors are commonly referred to as the Bragg factors:
- The location of all your residential real property and the approximate sizes and values of each of the residences
- The state where your spouse and children reside
- The state where your children attend school
- The state where you claim the homeowner’s property tax exemption on a residence
- Where your telephone records originate (i.e., the origination point of taxpayer’s telephone calls/ cell phone towers)
- The number of days you spend in California versus the number of days you spend in other states, and the general purpose of such days (vacation, business, etc.)
- The location where you file your tax returns, both federal and state, and the state of Residence on your tax returns
- The location of your bank and savings accounts
- The origination points of your checking account transactions and credit card transactions
- The state where you maintain memberships in social, religious, and professional organizations
- The state where you register your automobiles
- The state where you maintain your driver’s license
- The state where you are registered to vote and your voting participation history
- The state where you obtain professional services such as doctors, dentists, accountants, and attorneys
- The state where you’re employed
- The state where you maintain or own your business interests
- The state where you hold a professional license(s)
- The state where you own investment real estate property
- The indications in affidavits from various individuals discussing your residency
This list does not cover every single factor. Instead, it’s a simple guide to determining residency.
Your state of domicile is where you have your closest connections. Therefore, if you leave your state of domicile, it is important to determine if your presence in a different location is for a temporary or transitory purpose.
Be Prepared - Plan Your Disconnect from California
The complexity of California residency issues can have significant consequences for a taxpayer moving out of the state of California or for a taxpayer facing an FTB residency audit. It is important to do your due diligence when moving out of the state and ensure as many of the Bragg Factors boxes are checked off as possible. It is imperative to keep diligent records and keep track of every single day you spend outside of California for substantiation purposes if ever needed. It is best to plan and be ready for an audit and hope it will never come!
About The Author
Riana Linksy is a Senior Manager at Dark Horse CPAs specializing in Tax Strategy, Tax Planning, Accounting Services, and Fractional CFO engagements for her business clients. She operates out of Tucson, AZ, but services businesses nationwide. Interested in working with Riana? You can book a discovery call with her here.
About Dark Horse CPAs
Dark Horse CPAs provides integrated tax, accounting, and CFO services to small businesses and individuals across the U.S. The firm was founded to save small businesses (and their owners) from subpar accounting and tax services and subpar client experiences. These small businesses are Dark Horses among their larger and more well-known competition. Being a Dark Horse CPA means advocating for small businesses by bringing them the tax strategies and accounting insights previously reserved for big business. Get a quote today.