Avoiding California Exit Planning Missteps that Can Result in Dual State Residency
Updated: Jul 12
Relocating across California state borders can lead to unintended yet time-consuming and expensive consequences for those that that don't take California exit planning seriously. Overlooking eliminating important ties to California can lead the Franchise Tax Board to disagree with a taxpayer's claim they have permanently moved from the State - or disagree with the timing of the move - leaving the taxpayer exposed to obligations which can include past-year California state residency tax returns, amended returns, tax payments, penalties and interest. At the same time, the taxpayer's new state may also deem the the taxpayer a resident in accordance with their definition of residency and tax rules. The result? Two state residency tax filing and expensive state tax bills.
It' a fact State Tax Residency Audits are on the rise in many states - including California, New York and others. With a significant portion of many state budgets funded by income taxes, and the lack of attention many taxpayers pay to ensuring they have left no stone un-turned in keeping timelines and documents to clearly demonstrate they have left the state permanently for reasons other than temporary visits State Residency Audits can be a convenient source of revenue to fund depleted state coffers.
While states have their own definition of "resident", "non-resident" and "part-year" resident with few exceptions states commonly define a "resident" as an individual who is in the state for other than a temporary or transitory purpose. States consider a person’s “domicile" to be the place of his or her permanent home to which he or she intends to return to whenever absent from the state for a period of time. Most claim the right to tax an individual’s income if they are believed to be a resident and domiciled in that state. Usually, they also impose tax on 100 percent of a resident’s income from all sources, including portfolio income. Many states have exceptions for military personnel in active service and for individuals receiving medical treatment for an extended period of time.
Often, a major determinant of an individual’s status as a resident for income tax purposes is whether he or she is domiciled or maintains an abode in the state and are “present" in the state for 183 days or more (one-half of the tax year). However, each state sets i't own rules as what time spent in the state "counts" a day that needs to be allocated to it's jurisdiction. For example, some states will count a minute as "a day" spent in the state - while others don't count time spent in the state unless it includes an overnight stay. Know the rules.
Make no mistake the burden is on the taxpayer to prove through documented evidence and facts which states they spend time in during the year and how long they remain in each state state.
Additionally taxpayers need to be prepared to provide evidence to all other critical areas State Auditors will evaluate to make a formal decision of whether the taxpayer has made a permanent (versus temporary) change in domicile, and on what date the formal change has or has not occurred.
Areas taxpayers need to be prepared to have investigated by a State Auditor include:
Location of employment
Classification of employment as permanent or temporary
Location of business relationships and transactions, such as active participation in a profession or trade or substantial investment in or management of a closely held business
Serving on the board of directors for a business or charity
Living quarters—whether a person’s former living quarters were sold, rented out, or retained, and whether he or she leased or purchased real property in his or her new location
The amount of time spent in the state versus amount of time spent outside the state
State where the taxpayer is registered to vote
The state of issuance of a driver’s license or fishing/hunting permits
Location of the school a family’s child attends
Where personal belongings are stored
Memberships in country clubs, social, or fraternal organizations
If you are notified you are subject to a State Residency Audits, documents state auditors will likely want to review include:
Credit card statements—where charges are incurred, Where the bill is sent, and the location of the checking account used to pay the bill
Location of bank accounts, investments, and other financial transactions such as automated teller machine withdrawals
Resident and nonresident fishing/hunting licenses and park admissions
Jurisdiction issuing a driver’s license, vehicle registration, professional license, or union membership
Homestead tax abatement or credit applications and property tax bills
Church attendance and membership
Location of doctors, dentists, accountants, and attorneys
Official mailing address and where mail is received
Where an individual is registered to, and actually does, vote
If you live elsewhere but travel on a regular and frequent basis to another state, you'll want to maintain a journal that clearly indicates the dates on which you are in a specific state along with all documentation possible, including receipts to prove their whereabouts, activities and purpose in that state.
If you have previously filed a tax return in your current state but are changing your residence, it is imperative that you closely observe the formalities of making a change of residence and that you retain all documentation you may need to prove your new residency. Steps a taxpayer need to plan to take to build a strong case for a permanent move and streamline a State Residency Audit includes, but is not limited to:
Note the date of your intended change of residence
Document in writing the reason for the change in residence which shows basis and intent (i.e., permanent retirement and relocation)
Obtain a driver’s license in your new state
Register your vehicle in your new state
File a resident income tax return in your new state
Revoke any homestead claims or election on your home in your former state and file similar documents in your new state of residence
Register to vote in your new state
Open bank or brokerage accounts in your new state
Replace involvement with business, charities, and other organizations in your former location with activity in such organizations in your new residence
Change the mailing address for all bills, banks, insurance, doctors, etc. to your new state address
Keep a calendar of when you are in your former state versus when in your new state or states
Retain airplane tickets, credit card statements, hotel records, etc. that will support your calendar
Change professional licenses to your new state (if applicable)
Establish relationships with new doctors, dentists, accountants, attorneys, etc.
If you are contemplating or are in process of finalizing moving from California, let's get our conversation started. We'll assess your plans and intentions, ensure you have realistic and reliable financial and projections for 2018, 2019 and 2020 year-to-date performance and discuss architecting multi-case and multi-year financial and tax projections incorporating tax laws, plans and strategic tax moves that can plan you on-track to achieve material tax cash outflow savings and place you in full, proactive control.
Cobalt PacWest Advisors
303 Twin Dolphin Drive # 600
Redwood Shores, CA 9406
221 Main Street # 1416
Los Altos, CA 94022