If you’ve been doing business in California long, you know that the tax burden on businesses and residents is pretty high. Though California is not alone in it’s high state tax rate (up to 13.3%), many people have considered avoiding the taxes by moving or at least giving the appearance they have moved. But is “gaming the system” a good idea? You might want to think twice.

 "Loopholes" Require Legal Planning

Some deals look as if they may be loopholes waiting to be exploited. For example, if you are selling real estate or a business, and afterwards leaving the state—you may be curious as to what it would take NOT to pay California taxes on such a large sum of money. We’re not saying such a deal won’t work, only that you must plan very carefully and get the proper legal advice before attempting it. In most cases, such a deal would require planning ahead by nearly two years in advance in order to first establish residency in another state. And in the eyes of the law, if you have too many official ties to California, you may still be considered a California resident.

What's a Resident?

As far as the rules go, if you have lived in California for more than 9 months, you are presumed to be a resident. If you have been here for that long, you would have to prove that you were here for a transitory or temporary purpose to NOT be considered a resident. Where you have a domicile is important too – if you have a home in California and you live and pay taxes there, then you are a resident. Also, if your children are going to college in California and you’re paying the resident rate for tuition – that’s a discount you’ll have to give up if you plan on not being a resident.

It usually takes about 18 months away from California for the state to assume you are no longer a resident. And remember, the residency requirements for states you are moving to vary, so there may be more hoops to jump through before you may be considered a resident of another state. 

Home is Where Your Connections Are

If you are gone most the year, but have a home in California you expect to return to, then that also establishes your residency. That’s true even if you live out of hotel rooms and spend months travelling around the world– your domicile still technically anchors you in California. Also voter registration, church membership, vehicle registration or where you own and operate a business can be used by the law to establish your residency. So if you plan on NOT paying California taxes, you’ll have to give up all these things as well.

This gist of it is this: if you plan on moving to avoid California taxes, you really have to move out of California. 

There Are Some Exceptions

Certain situations, like homes and businesses in separate states, or multiple homes in different places can get into a grey area. We recommend you get legal advice and also speak with a tax professional if you have further questions about residency. PDM's tax experts can help advise you on the best course of action. Contact us; with our years of technical experience, advanced training, and cutting edge technology, we are your financial partner.