By Torakichi Jesús Oba, EA, CPA
I apologize in advance to my CPA colleagues in Texas for the sudden influx of new clients who have entire conversations consisting of the word ”dude,” as leaving California for Texas has become quite popular of late. However, I urge a certain measure of caution with these monosyllabic types because breaking California tax residency brings to mind the famous line from Hotel California, ”You can check out anytime you’d like, but you can never leave.”
California tax residency entails worldwide taxation of one’s income to its state treasury. For purposes of California income tax, a tax resident is someone who is present in California for other than a temporary or transitory purpose, or someone who is domiciled in California but outside of the state for a temporary or transitory purpose. To successfully cease to be a tax resident, one must successfully establish a domicile outside of California and have their closest ties shift to their new jurisdiction of residence. These close ties are the specifics of day-to-day life that include, but are not limited to, where one’s spouse/children are located, location of principal residence, state where taxpayers are registered to vote and other criteria that give substance to the daily life led by any taxpayer. The State of California Franchise Tax Board (FTB) Publication 1031 gives a great overview to the subject and provides specific examples that are of use when determining tax residency.
However, just because someone successfully breaks tax residency does not mean they are done paying California tax, as nonresidents are taxed on income from California sources. California nonresidents are generally subject to withholding on sales of California real estate, income allocations or distributions from CA S-Corporations and CA partnerships. These withholding requirements are addressed in FTB Publications 1016, Real Estate Withholding Guidelines and 1017, Resident and Nonresident Withholding Guidelines.
I would boil all this down to the following key concepts and reinforce it with the specifics in the FTB publications:
- Breaking CA residency – Make sure that a taxpayer really does live and go about their day-to-day life in Texas and does not go back to California with any regularity.
- California sourced income = California tax due with the potential of backup withholding.
T. Jesús Oba, EA, CPA, is an accountant based in San Diego, CA, who specializes in international taxation matters. He has written for Tax Notes International and CalCPAs and works collaboratively with TXCPA’s Federal Tax Policy Committee. When not in his office, Jesús is looking for delicious burritos.