Currently, these are the test that the Franchise Tax Board, FTB, apply to determine whether you are a California tax resident:
FTB Closest Connection Test:
- The location of your largest and most expensive residential real property. Yes, this means that if you left California for another State or out of the USA but still have highly valued real property as your second home or a rental property then this will count against you effort to cut tax-ties with the FTB.
- Where your spouse and children live is also a salient issue. Many families leaving California find it difficult cutting their ties to relatives, friends, schools, trusted professional services such as doctors, hospitals, activities and professional organizations that license professionals such as lawyers, teachers, CPA, doctors and others.
- Where your children attend school is a particularly emotional issue since there are many world renowned schools that allow students with certain medical, psychological and other issues to be successfully addressed which allows the child to progress in their education.
- Where you claim your homeowners property tax exemption is another official issue facing families that are moving outside of California. The California Constitution provides a $7,000 reduction in the taxable value for a qualifying owner-occupied residence. The home must have been the principal place of residence of the owner on the lien date, January 1st. Once you have claimed this exemption, you will need to terminate this exemption and timing is critical. You are responsible for notifying the assessor when you are no longer eligible for the exemption. December 10th is the last day to terminate the Homeowners’ Exemption without penalty; your county assessor should receive your notice of ineligibility by that date.
- Where most of your phone calls are made from is also an important factor since it can tie a person to California without the person knowing or in some cases the person tries to falsify phone records by turning off the phone. Here are some acts of persons that were very harmful in residence audits:
Data trailing happens when an application on your cell phone continues to distribute a GPS address without confirming the cell phone’s location with the network. It often happens when the phone is out of reach from a signal. For example, a telephone service provider like Comcast, for example, records your location as Los Angeles when you were in fact in your Texas residence using your cell phone, this is because a microcell, a small mobile phone base station connected to the phone network via the internet, is used to improve mobile phone reception within a particular area. Remember when you buy your service in California this microcell has you registered in California and when you move to Texas this portable microcell follows you to Texas yet continues to show the calls being made in California.
Caveat, it is never acceptable to advise a client to turn off their phone, or leave their phone at home, while in New York. If a taxpayer has knowingly and willingly turned off their cell phone, knowing those records are to subsequently be used in an audit, in an effort to evade or avoid paying New York taxes, they have committed tax fraud. Civil tax audits can be difficult, long, and costly processes for taxpayers, but they pale in comparison to what a criminal tax audit brings.
- The number of days you spend in California as opposed to the number of days you spend elsewhere (and why you spend your time here or there, e.g., business or pleasure). If you travel back to California for inspecting your rental property; be prepared to explain the number of days, have a contemporaneous writing during your inspection, hiring repair people, repairs, and other activities directly connected to your rental property to reasonably need the number of days in California. NB: The State of California and the FTB can subpoena your credit card statements, phone records, airline’s ticketing, car rentals, Uber, as well as your rental neighbors and your own renters.
- Where you file your federal and state tax returns, and what address you list as your residence on those returns, so be sure to change your IRS and FTB address as soon as possible this will also benefit you to receive future refunds or correspondence from the IRS and FTB.
There are several ways to notify the IRS of an address change: If you change your address before filing your return, enter your new address on your return when you file. When your return is processed, both the IRS and FTB will automatically update their records.
Also, be sure to also notify your return preparer so the new address can be added to the next tax return preparations. Alert, one factor to consider when leaving California is to change your tax return preparer to a preparer in the new state. However, if you have a licensed Attorney or complicated tax return for California as a Non-Resident filer, you may keep that Attorney or CPA but be prepared to show why you have retained these professionals.
Notify the Post Office if you change your address after filing your return, you should notify the post office that services your old address. Because not all post offices forward government checks, you should also directly notify the IRS as described below.
By Form, to change your address with the IRS, you may complete form 8822.
In writing, you may write to inform the IRS and/or FTB that your address is changing. Tell us you’re changing your address by providing your:
- full name
- old and new addresses
- social security number, individual taxpayer identification number, or employer identification number, and
Joint Filers – If you filed a joint return, you should provide the information and signatures for both spouses. Send your written address change information to the IRS addresses listed in the instructions to the tax forms you filed.
Separated – If you filed a joint return and you now have separate residences, each joint taxpayer should notify us of your new, separate addresses.
- The location of your bank accounts is important to establishing your intent to permanently move out of California. National banks like Wells Fargo and Bank of America have branch offices in all 50 State, so you will need to move to a branch in your new State and establish a banking relationship there. If you have a local bank or credit union where your mortgage is held on a rental property in California, then you can keep that banking relationship.
- The origination point of your checking and credit card transactions. This is important and we discussed this in-depth above.
- Where you maintain your social, religious and professional memberships is also important and addressed in detail above.
- Where you register your automobile goes hand-in-hand with your new State’s DMV which will need show your recent new mailing address.
- The state that issued your driver’s license, see immediately above.
- The state where you vote also is used to determine representation in which political party and requires you to state your State of current residence under State and Federal law.
- Where your doctor, dentist, accountant, and attorney is located is critical to show you have permanently left California, but this may be a less than bright-line test when your health is being treated on a long term care with specialized treatment and health care professionals that may not be in your new State. Note, the burden of proving this is with you.
- Where you are employed is very important and again not as clear as one may think. Many employees are working from home for an Employer located in another State. For the State of California a recent case works against you; Blair S. Bindley, a screenwriter, was a resident of Arizona during the 2015 tax year. The same year, Bindley earned approximately $40,000 of income: $15,000 from the entity Lakeshow Films, LLC and $25,000 from the entity Mindbender Enterprises, LLC, both of which were headquartered and registered in California. Remember, the FTB annually matches income records obtained from various reporting sources against filed returns, enabling the Franchise Tax Board to accurately identify taxpayers with unfiled California income tax returns. This explains how the income tax filings of an Arizona taxpayer could come to the attention of a California tax agency. The FTB determined that, although not physically a California resident, Bindley was nonetheless liable for state income taxes because he received California sourced income.
- Where your business is located will be a large part of the FTB efforts to classify your business income as California sourced and taxable, but let’s talk about what other options may be available to you on this point.
- The state in which you hold your professional license(s) is also important. The FTB currently and has for at least 10 years looked at professionals not living in this state but still billing them as if there were working here. I have handles many of these FTB claims successfully for: Construction Contractors, CPA, Attorneys, Doctors, Registered Nurses, and many others.
- The location of your investment real property is more of a determining factor of California sourced income rather than residence. You should note that even if you left California years ago, even an Incentive Stock Option that was partially earned during your time residing in California and then your moved away will still alert the FTB of your Option exercising and send you a tax letter for prompt payment, contact me if this happens to you.
- Affidavits from individuals discussing your residency which could come from ex-spouses, relatives, creditors, creditors that claims were discharged in bankruptcy and many others.
NB: None of these factors alone will determine whether or not you are a California resident, except that claiming the California homeowner’s exemption (#4) or being registered to vote here (#13) could be determinative. As a general rule, the California Franchise Tax Board (FTB) compares all of the factors, weighing some more than others.
Objective Intent Test:
You are considered to reside in the place where you intend to return even after a lengthy absence. If you keep your personal property and/or a California house ready for you in case you come back, this shows that you may have left only for a temporary reason and that you still consider California to be your permanent home.
You are generally presumed to be a California resident for a period of 18 months after you leave the state, so even if you claim California resident status on your tax return for 2020, there is still a rebuttable presumption that you are still a California Tax Resident for another 18 months. Note this is rebuttable by submitting evidence to the FTB. However, you still have the burden of proof that you are no longer a resident of California and meeting any of the above 19 factors will be weighed against you.