The Wall Street Journal has reported that high-income residents are continuing to leave blue states, with California leading the pack as the biggest income loser at $23.8 billion. This exodus can be attributed to the high state income tax rates in California, with the new top rate reaching 14.4% as of January 1, 2024. There have been proposals in Sacramento to increase the top rate even further to 16.8%, although these bills have failed to pass. The 13.3% rate still applies to capital gains, which is a significant source of frustration for California investors.
California’s Franchise Tax Board (FTB) closely monitors the residency status of taxpayers, and can assess taxes even after they have left the state. Individuals who spend more than nine months in California are presumed to be residents, making it crucial for taxpayers to carefully plan their moves to avoid residency audits. Filing a non-resident tax return after leaving California can be a strategic move to avoid potential tax liabilities in the state. California looks at objective factors, such as time spent in California versus time spent outside the state, to determine residency status.
Physical presence is a key factor in determining residency in California, with individuals who spend more than 9 months in the state presumed to be residents. There are also strict rules for seasonal visitors, who must not work while in California and meet other requirements to qualify as non-residents. Many people who leave California struggle to distance themselves from the state due to various connections, making it important to carefully plan their moves to avoid tax disputes. In some cases, California can assess taxes on individuals regardless of where they live, highlighting the importance of proper tax planning.
It is crucial for individuals leaving California over tax reasons to avoid costly mistakes in the process. This includes ensuring that their residency status is clearly established, and that they file non-resident tax returns if necessary to report California-source income. California’s FTB can audit taxpayers for an extended period, making it essential to comply with all tax laws and regulations to avoid potential penalties. With the high tax rates in California, many high-income residents are choosing to relocate to states with lower tax burdens, leading to a significant exodus from the state.
The tax rates in California, including the 14.4% top rate for high-income earners, make it a less attractive destination for wealthy individuals looking to minimize their tax liabilities. The state’s strict residency rules and monitoring by the FTB add an additional layer of complexity for individuals looking to leave California. Proper tax planning and compliance with all tax laws are essential for those considering a move out of the state, to avoid potential tax disputes and liabilities. As the wealth exodus from blue states like California continues, more high-income residents are seeking out states with lower tax rates and more favorable tax environments.
