California Residency; Are you here or not?
Similar to the IRS, California residents are taxed on their worldwide income, regardless of the source. However, California non-residents are only taxed on their California source income (which can be a tricky calculation). Part-year residents are taxed on all income earned while being a resident in California and all income sourced in California. With these major differences, it is important to know how you become a California resident.
According to California law, a resident is:
- Every individual who is in California for other than a temporary or transitory purpose; and
- Every individual domiciled in California, who is outside the state for a temporary or transitory purpose
Additionally, any individual who is a resident of California continues to be a resident even though temporarily absent from California. A nonresident is everyone else who does not fall under the above law.
The issue arises when it is not clear if a person is domiciled in California or a different state. California looks at a person’s domicile to determine whether a person is a resident or in temporary or transitory status. Domicile is the place where a person is most settled, has permanent connections, and where they intend to return. A person can only have one domicile. The question whether a person is domiciled or their presence is temporary or for a transitory purpose is based on the facts and circumstances. The Franchise Tax Board (FTB) looks at many factors to determine residency status such as: connections with friends/family, professional associations, voting registration, driver’s license, property owned, employers, utility bills, bank accounts, children’s school, and anything else that may show that a person was/is in California. Furthermore, there is a presumption that if a person spends more than nine months in California, then they are presumed to be a resident. The inverse though is not true; a taxpayer can’t claim that they spent less than nine months and thus are not a resident, however, it can be proven through the facts.
Additionally, due to COVID and people being able to telecommute, many taxpayers moved to California. Some were shocked to learned that they are now subject to California tax, and others who did not file in California will hear from the FTB soon. The FTB has a way of finding taxpayers who may need to report income in California based on revenue sources, real estate records, or other methods.
Becoming a California resident carries with it potentially a very heavy tax burden. Therefore, it is very important that taxpayers have proper planning and advice whenever spending time in California or earning money from California sources.