California, under RTC §1704(a)(2), defines a resident as, “somebody who is typically domiciled in the state or who is outside the state for either temporary or transitory purposes.” We will dive into how California defines what temporary or transitory purpose is as we get further along. There are different concepts about residency, but the most common one stems from the individual perspective. If you pick up and leave California, move to Texas and never return to California, you have changed your residence. The problem is that most situations — whether or business-related — are not usually that cut-and-dried. However, if a Californian earns income in another state, they will get a credit for any taxes that they pay in that state. If you are considered a resident of California – regardless of where your income is derived from – California will seek to impose some measure of tax on you. The key thing to think about, is do you have a domicile in the state of California or are you only outside of California for a temporary or transitory purpose? In the minds of state policy creators, those who enjoy the protections and benefits of the state should pay taxes for the benefits and protections they enjoy.What Residency Means in California
Temporary vs. Transitory
Under RTC § 17014(d), an individual who is domiciled in that state but who is in California or who is outside the state for less than 18 months, is somebody who California can classify as being there for a temporary or transitory purpose.
If you are outside of California for more than 18 months for employment, then you're considered outside the state for something other than a transitory purpose. You have become a nonresident of California.
You do not gain your "freedom" immediately just by leaving the state. You have to either spend the requisite amount of time outside of California or you have to take actions that would sever your residency from the state of California, showing your intention to leave.
You do have some grace periods to come back and visit. When you are a non-resident for this 18-month period, you can still return to California for up to 45 days, without changing your status.
There are two exclusions to this rule:
- If you have income from a tangible property and access to $200,000 a year, this employment-related exception to domicile does not apply.
- If you are leaving the state to avoid paying California taxes, there is an exclusion for that as well.
But, the more contacts you have with California, the more likely California is going to view your presence outside the state as a temporary or transient purpose. This also applies to the spouse accompanying the taxpayer.
Your Tax Liability If You Live in California
The key take-aways from this chapter were to gain an understanding of residency, domicile, temporary and transitory. It can get confusing and if you are not sure what you are doing, you can end up paying more taxes than you need to. Nobody wants that.
The state of California’s take on this is that if you are enjoying the benefits of living in the state, then you need to pay your fair share of taxes. So, if you jump from state to state frequently, your records need to reflect how long you lived in each state (including California) and why.
If you live outside of California for part of the year, then it would be helpful to discuss your situation with me. My firm has a proven track record working with California residents who only live in the state on a part-time basis. We can help you minimize your California state tax liability and avoid a residency audit.
Certainly! Understanding residency, domicile, temporary, and transitory status within the context of California tax law is quite nuanced. As an expert in taxation and residency criteria, let's break down the concepts mentioned in the article:
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Residency in California: The definition of residency in California, as per RTC §1704(a)(2), revolves around domicile, indicating someone typically domiciled in the state or temporarily outside for transitory purposes.
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Domicile: It refers to the place where an individual has their true, fixed, permanent home and principal establishment, with the intention to return when absent.
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Temporary or Transitory Purpose: California considers an individual who is outside the state for less than 18 months as being there for a temporary or transitory purpose. Beyond this period, for employment reasons, one might be considered a nonresident.
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Nonresidency and Duration: Staying outside California for over 18 months due to employment reasons establishes nonresidency. However, simply leaving the state doesn't immediately change residency status; one needs to demonstrate intent to sever residency.
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Grace Periods and Visits: Despite nonresident status, there's a 45-day grace period to visit California without altering residency status.
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Exclusions to Rules: Exceptions exist, such as income from tangible property and access to $200,000 annually, which can impact the employment-related exception to domicile.
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Tax Implications: California imposes taxes based on residency status. If an individual enjoys the benefits of residing in California, they're expected to pay state taxes, and the more substantial the ties to California, the more likely the state will consider the absence temporary or transient.
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Tax Liability and Records: Maintaining accurate records of time spent in different states, including California, is crucial to avoid overpaying taxes or triggering a residency audit.
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Tax Minimization Strategies: Expert advice can help individuals who reside part-time in California minimize state tax liabilities and navigate residency-related audits effectively.
Residency determination involves a multitude of factors, such as time spent in the state, the nature of ties to California, and an individual's intent. It's a complex area where seeking professional assistance, as hinted at in the article, is often wise to ensure compliance with California tax laws while minimizing tax obligations.
