Californians (or ex-Californians) making a certain amount of money who leave the state could soon find themselves paying a small portion of taxes to California, regardless of whether they live there anymore. This proposed “Exit Tax” is part of the California wealth tax proposal wherein new rules are established for those individuals or businesses with over $30 million in assets for a tax year.
Understanding What the California Exit Tax Is
The California Exit Tax proposes that if you or your business have been a full-time resident of the state of California and you make $30 million per year (or $15,000,000 if a married taxpayer is filing separately from their spouse), any money that you make from business, income or investments made in the state would be taxed at a rate of 0.4%. This is a one-time tax that is paid upon leaving California.
Why the California Exit Tax Was Proposed
The California Exit Tax was proposed for two purposes. The first purpose is to protect the state. The idea is that California should recoup the money the state invested in the development of that wealth, such as tax breaks, financial incentives, and infrastructure support. These were all investments that the state gave to a business, individual, or the public at large in the spirit that they would remain in the state for a long enough time for the state to reap the benefits of having the business there.
The second purpose is to help close a capital gains loophole where people would move out of California and liquidate their assets in another state to avoid taxes. This type of movement purely to avoid paying taxes is unattractive both from the perspective of state finance and from the perspective of social stability.
For these reasons, among others, the Exit Tax was added to Assembly Bill 2088.
Who This Tax Applies To
For this tax to apply to you, you have to fulfill two broad qualifications. First, you have to make a sufficient amount of money. Second, you have to have been a resident of the state.
The Wealth Requirement
If your tax year valuation is greater than $30 million (or $15 million if a spouse is filing separately), then the Exit Tax may apply to you. People whose tax year valuation falls below this will be unaffected when moving to different parts of the country.
The Residency Requirement
The California Franchise Tax Board establishes policies that determine whether t a person is a resident of California. They consider a great many things when evaluating whether a person qualifies as a resident of California.
Some of these qualifications are fairly intuitive and straightforward. These include:
- The location of the largest residential property that you own
- The residence of your spouse and children
- Whether your children attend school in a California school district
- How many days you spend in California each year. If you or your family are not residing in your home for the majority of the year, you may not qualify as a California resident.
However, not all of the things that the Franchise Tax Board considers are quite so straightforward, and the answer to any one individual question will not be sufficient to be one hundred percent confident that the Franchise Tax Board will not consider you to have some proportion of residency. Some of the less commonly thought of considerations for whether someone is a California resident include:
- Whether your vehicles are registered in California
- Whether you claim California homeowner exemptions on your taxes
- Where your account statements or credit cards are sent
- What address is listed on your federal or local tax return
- Whether you vote in California state elections
This is a non-exhaustive list of considerations, but these are a part of what goes into determining an individual’s residence status for all tax purposes in California. Since the matter of whether the Exit Tax applies to you would truly boil down to a matter of residence, these will become even more important if the Exit Tax comes to pass.
What the Future Holds
While many people are more or less optimistic about whether the bill establishing the Exit Tax will pass, the current system is already incredibly complicated. Incorrectly assessing your tax liability can cause significant financial strain on your plans for your business and your future.
Getting Tax Assistance with Fishman, Larsen & Callister
FAQs
Q: How Can I Get Around Exit Tax?
A: One of the biggest factors in whether the California Exit Tax applies to you will be your residency status, which can be a particularly complicated matter. A licensed tax attorney well versed in the topic may be able to assist you with the matter. Because every tax situation is unique, there may be portions of your income or wealth that are not taxable under the Exit Tax.
Q: Do I Pay CA Taxes if I Work Remotely?
A: This is another matter which is largely determined by your residence. If you live and work completely in another state and do not own or rent a residence in California, you may not have to pay California taxes. However, residence is a complicated matter. If your spouse or children live in the state, if you vote in the state, or if many other situations apply, you may be counted as a resident.
Q: Does CA Tax Out-of-State Capital Gains?
A: The short version is yes, California taxes any income regardless of where you earn it, and that includes 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.
Q: If I Make Less Money, Do I Have to Pay the Exit Tax?
A: 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.
If you are ready to approach your taxes with the confidence and help of an experienced team, contact Fishman, Larsen & Callister to schedule a consultation today. No matter the size of your tax-related problem or the scope of your ambition, we will help you with the detailed legal guidance required to avoid complications in the future.