California has long been renowned for its stunning landscapes, vibrant culture, and bustling economy. However, with the Golden State’s high taxes and cost of living, some individuals and businesses may consider relocating to more tax-friendly states. But before waving goodbye to California, taxpayers need to be aware of the California Exit Tax and its potential impact. In this blog post, we will delve into the details of the California Exit Tax, its applicability, and its implications for those looking to leave the state.
- Exit Tax vs. Capital Gains Tax: While the Exit Tax is specific to certain exiting taxpayers, capital gains taxes apply to various investment gains, regardless of residency.
- Pre-Exit Planning: Proper planning may involve restructuring assets, timing the exit strategically, or considering trusts to manage their financial affairs efficiently.
- Residency Status Matters: Establishing non-residency status is critical to avoiding the California Exit Tax.
What is the California Exit Tax?
The California Exit Tax is a tax measure implemented by the state for certain individuals and businesses that decide to relocate outside of California. It primarily targets high-net-worth individuals, business owners, and investors who have significant assets in the state and aims to capture tax revenues from them even after they have left its jurisdiction.
Applicability and Triggers
The California Exit Tax is applicable to individuals or businesses that are classified as California residents (or ex-Californians) for tax purposes and meet one or more of the following criteria:
- The amount of the California exit tax is 0.4% of an individual’s net worth over $30,000,000 in a tax year, no matter where it’s located—within CA, other states within the US, or overseas. This amount is halved to $15,000,000 if a married taxpayer files a separate return to their spouse.
- The one caveat is that there is no California exit tax on real estate (but if the real estate is within state lines, it would still be taxed under California Revenue and Tax Code § 17591).
- The exit tax applies to both businesses and individuals who leave California. This includes businesses that move their operations out of state as well as individuals who relocate to another state. It should be noted that the exit tax only applies if you’re moving to another state, not within California. The process can be complicated, so don’t hesitate to work with a professional.
Planning Your Tax:
- Exit Tax vs. Capital Gains Tax: It’s essential to differentiate the California Exit Tax from the federal and state capital gains taxes. While the Exit Tax is specific to certain exiting taxpayers, capital gains taxes apply to various investment gains, regardless of residency.
- Pre-Exit Planning: To mitigate the impact of the Exit Tax, taxpayers should consider engaging in pre-exit planning with experienced tax professionals. Proper planning may involve restructuring assets, timing the exit strategically, or considering trusts to manage their financial affairs efficiently.
- Residency Status Matters: Establishing non-residency status is critical to avoiding the California Exit Tax. Demonstrating non-residency involves meeting specific criteria, such as maintaining a permanent residence elsewhere, spending limited time in California, and severing ties with the state.
- Tax Treaty Considerations: For international taxpayers leaving California, tax treaties between their home countries and the U.S. may impact their Exit Tax liability. Understanding the provisions of relevant tax treaties is vital for proper tax planning.
Impact on Exiting Taxpayers:
High Tax Liability: The California Exit Tax can result in substantial tax liability for high-income earners, high-net-worth individuals, and business owners. Depending on their assets and net worth, taxpayers may owe hundreds of thousands or even millions of dollars in Exit Tax.
Impact on Wealth Accumulation: The Exit Tax may erode a significant portion of an individual’s wealth when they choose to leave California. This can impact long-term financial planning and reduce the funds available for investment, retirement, or other financial goals.
Potential Relocation Delays: The prospect of facing a substantial Exit Tax liability might cause taxpayers to delay their relocation plans. This delay can have implications on job opportunities, business growth, or personal/family circumstances.
Potential Double Taxation: Some taxpayers may find themselves subject to double taxation if they move to a state with higher taxes than California. In such cases, they could be paying Exit Tax in California and facing higher ongoing tax burdens in their new state of residence.
California Exit Tax is a significant consideration for individuals and businesses contemplating a move out of the Golden State. Proper tax planning, understanding residency status, and seeking professional advice can help mitigate the financial impact of this tax measure. Whether you are a high-net-worth individual, a business owner, or an investor, navigating the complexities of the California Exit Tax is crucial to ensuring a smooth transition to a new tax jurisdiction.
It is essential to remember that tax laws are subject to change, and individual circumstances may vary. As such, it is crucial for taxpayers to consult with qualified tax professionals to receive personalized advice tailored to their specific situation. With careful planning and informed decision-making, taxpayers can navigate the process of leaving California while minimizing the impact of the Exit Tax on their financial well-being.
>>You may find interesting: Form W-4: How to Fill It Out and Why It Matters
How Can I Get Around Exit Tax?
Your residency status, which can be a particularly complicated matter, will be one of the most important factors in determining whether the California Exit Tax applies to you. A licensed tax attorney who is well-versed in the subject matter may be able to help you with the situation. Because every tax situation is unique, there may be portions of your income or wealth that are not taxable under the Exit Tax. So don’t hesitate to contact a tax professional!
Do I Pay CA Taxes if I Work Remotely?
This is another issue that is heavily influenced by your location. If you live and work entirely in another state and do not own or rent a home in California, you may be exempt from paying California taxes. However, residence is a complicated issue. You may be considered a resident if your spouse or children live in the state, if you vote in the state, or if a variety of other circumstances apply.
Does CA Tax Out-of-State Capital Gains?
Yes, California taxes all income, regardless of where it is earned, including capital gains. The long version is that it is mostly determined by residence. Residence truly is the core issue that has to be established before a meaningful tax determination can be made.
If I Make Less Money, Do I Have to Pay the Exit Tax?
No, if your tax year valuation is less than $30 million combined between you and your spouse or $15 million if you are filing separately, then the Exit Tax does not apply to you. This tax is very specifically targeted at those with large tax year valuations.