California Exit Tax?

The proposed California Wealth Tax not only imposes a new tax on California residents, but the bill also introduces the possibility of an “Exit Tax” for individuals who choose to relocate outside the state. While not explicitly called an Exit Tax, the proposed Wealth Tax has the potential to create a significant financial burden for those who move out of California in search of lower taxes.

For taxable years from 2024 onward, the tax rate would be 1.5% on a net worth exceeding $1 billion, and starting from 2026, the proposed tax rate would be 1% on a net worth exceeding $50 million. For this purpose, an individual’s net worth does not include any real property, mortgages, and other liabilities secured by real property. The wealth tax would apply to full-time, part-year, and temporary residents, subject to apportionment. The exit tax structure would allow the wealth tax to be applied for several years after a taxpayer leaves California (as a “Wealth Tax Resident”).

The proposed wealth tax would not impact California residents whose net worth is below $50 million, and only those residents who are already subject to the wealth tax would be required to pay the Exit Tax if they choose to relocate outside the state. As with any new tax proposal, it is unclear how many residents would be impacted directly and indirectly. The proposed bill would require a yearly valuation update filed with the taxpayer’s returns for classes of assets that are not publicly traded.

Even though the IRS already has an exit tax, the proposed bill is controversial because it may violate the Due Process or Commerce Clauses of the Constitution, including whether the Due Process Clause is violated by imposing a tax on individuals who no longer reside in California, and whether the Commerce Clause is similarly violated by discriminating against interstate commerce. Advising taxpayers on how to plan for a wealth tax is difficult without both the bill and the regulations that would enforce the legislation. However, it is better to be prepared. For help planning around the Wealth Tax, the Exit Tax, or other long-term wealth and asset protection, contact our expert attorneys at Hone Maxwell, LLP.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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