How to Avoid Paying California State Income Tax- PillarWM
State taxes can accumulate to cost you a hefty tax bill, particularly if you live in a state with a high tax rate. If you reside in California, you can understand how high tax rates can affect your income.
Therefore, it is in your best interest to work with an expert who is well-versed in how to avoid paying California state income tax.
Tax planning and financial planning are crucial for individuals looking to invest more than 5 million dollars. If you would like to read about our insights on the subject, you can request a copy of our book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning – For Families With Liquid Investable Portfolios Between $5 Million and $500 Million.
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Tax management is essential to secure your financial health and safeguard your wealth. Wealth managers at Pillar Wealth Management are experts in helping investors seeking to invest between 5 million to 500 million dollars with their taxes. If you would like to get in touch with one of our experts, you can schedule a meeting with us.
Table of Contents
What Does California’s State Income Tax Law Imply?
Before we talk about how to avoid paying California state income tax, we will discuss what the state’s tax laws imply.
Californians are taxed on all of their income, no matter where it comes from. This covers earnings from jobs in California and other states or countries, as well as earnings from investments and other sources. Taxes in California have always been hefty, and many people do everything they can to avoid paying them. This is especially true for someone who anticipates a significant increase in income.
California, much like the federal government, uses a marginal rate tax system, which means that only those with income above a specific level face increasing taxes. For instance, the 13.3 percent income tax bracket applies to a net income over $1 million. The anticipated hike would raise the rates to 14.3% on incomes over $1 million, 16.3% on incomes over $2 million, and 16.8% on incomes over $5 million. Similarly, the proposed 0.4 percent wealth tax would only be applicable for those with incomes above $30 million.
If you’re trying to find ways on how to avoid paying California state income tax, you might have some of the following questions.
How Many Days Can You Live in California Without Paying Taxes?
A California resident can be regarded as a non-resident under the state’s tax rules if they relocate for the purpose of work and maintain a domicile outside the state for at least 546 days – one and a half years. Temporary visits to the state are allowed but should not exceed a limit of 45 days; otherwise, your non-resident status might not be considered valid.
Do I Have to Pay California Income Tax If I Live Out of State?
Even if you’re not a California resident, all of your income earned in the state is taxable. If the state determines you to be a resident, it has the authority to tax all your revenue, regardless of where it comes from.
Even if you don’t live in California, you can be considered a resident up to a period of time, i.e., 18 months. If you live out of state and are considered a non-resident, you are only liable for taxes on any income that is generated within the state of California. A non-resident’s income from local sources covers revenue from a California-based trade, business, or profession.
How to Avoid Paying California State Income Tax
Avoiding state income tax in California is tricky. The Franchise Tax Board (FTB) will examine your bank statements, purchase records, and other transactions to prove that you are truly a resident of California.
The FTB is especially harsh on people who they feel have relocated from the state to escape paying high taxes. Hence, it is advised to work with a professional to help you safely minimize your tax burden. Wealth protection is essential for high-earners, and our book, The Art of Protecting Ultra-High Net Worth Portfolios and Estates – Strategies for Families Worth $25 Million To $500 Million, can provide insights on how you can safeguard your assets.
Which Income Sources are Taxed in California?
If any of the income you earn comes from a California source, you most probably owe taxes on it. If you derive income from a business or trade entirely outside the state, that amount is not taxable. Wherever the line gets blurry between earning partially within and outside California, determining your taxable income becomes a little more complicated.
For example, if you live in another state but provide services to residents or businesses in California, you will be liable for taxes in California. Hence, it is better to be aware of which income sources are taxable and under which circumstances.
Non-residents must pay taxes on distributions from partnerships, S corporations, and simple trusts that are premised on California income sources. Any benefits offered by your employers, whether it be severance pay, moving benefits, or bonuses, are taxable if the company rendered its work or services within California.
Intangible personal property includes bonds, stocks, and other financial instruments. As a result, the taxation of such instruments will be fully dependent on the residence of the holder, not the asset. When it comes to real estate, however, the taxing jurisdiction will be the state where the land is located.
As a high-net-worth investor, you likely have numerous assets in your investment portfolio. Managing them while considering their tax implications can be overwhelming. If you would like to know how we improve our client’s portfolio performance, you can refer to our Performance Guide. Understanding how various income sources are taxed in California can require the assistance of an expert. You could consult a tax accountant, a tax advisor, or a tax attorney. If you would like assistance in other wealth management services, you can consider contacting one of our wealth managers for a free consultation.
How Does California Determine Residency?
In order to answer the question, “Can you avoid California taxes by moving?” it is wise to have a strategic plan that analyzes your personal and financial life to determine the right step for you. If you would like to know how our wealth managers assist high-earners with their financial planning, you can request a copy of our book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning – For Families With Liquid Investable Portfolios Between $5 Million and $500 Million.
If you stay more than six months in a state, it is assumed that you are a resident. California, on the other hand, does not follow these guidelines. So, before you start looking for ways on how to avoid paying California state income tax, you should know how California determines its residency.
If you spend more than 9 months in the state of California, you are presumed a resident by the Franchise Tax Board, but spending less than 9 months in the state doesn’t necessarily classify you as a non-resident. The state bases residency on the fact that you are a resident of the place where your closest or strongest connections lie. If you work outside of the state, it will take 18 months for you to be considered a non-resident.
To establish that you are no longer a resident of California, you will have to ensure that you have no income-generating activity in the state and that you are establishing residency in another state. This can include steps such as owning and living in a home in your new state, registering your car in the new state, getting a new driver’s license, registering to vote, taking local church memberships and committee participation, and more.
Part-Year Resident Vs. Non-resident
A part-year resident is liable to state taxes on all worldwide income earned, as well as income earned from California sources during your time as a non-resident. You can be considered a part-year resident if you lived in or out of California in the tax year.
You are considered a non-resident if you visit the state for transitory purposes, a vacation, or to complete a job, transaction, or contract for a short time period. On the other hand, if your domicile state is California, but you are outside the state for employment purposes, you could qualify as a non-resident under safe harbor.
Changing your residency is not as simple as it sounds. That is why we suggest that you get advice from a financial advisor on which approach best suits your current financial situation. Our wealth managers have decades worth of experience in advising high-earners on an array of financial matters. They can use strategies to help boost your capital growth while minimizing loss. You can read more about these strategies in our five critical shifts guide.
Why You Should Work with a Tax Expert
Financial planning incorporates your tax plan, keeping your goals and objectives a priority. Often, a financial planner might advise you to relocate after retirement, for example, to minimize your tax obligations. However, there are other factors you need to consider before making important life decisions. In addition to hiring expert tax advisors to safeguard your interests, it’s critical to think about why you’re leaving California and what you want to achieve.
More importantly, you have to make sure everyone in your family is on the same page. If members of your family decide to stay behind, the California tax authorities could state that since you have strong connections in the state, you should be taxed as a Californian resident. Careful strategic planning is required to cut ties with California and determine whether this is the correct approach for you. Experts can help you navigate the complexities of financial planning and tax planning. You can read more about this by requesting our book,7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning.
The process of how California and other states tax income, determine residency, and coordinate their taxing is complex. In some cases, two states might be entitled to tax your income. In others, you can claim the tax amount you paid in a lower-tax-rate state as credit for a state with higher tax rates. The policies have multiple variations and factors to consider, which is why working with a tax expert is in your best interest.
Professionals such as wealth managers can help you answer questions such as, “Do I have to pay California income tax if I live out of state?” or”How many days can you live in California without paying taxes?” They can guide you on how to avoid paying California state income tax. Our wealth managers are experts in implementing tax-loss harvesting strategies for high-net-worth individuals. You can find out more about our wealth management services by contacting us and scheduling a meeting.
Last Words
In order to come up with the right strategies on how to avoid paying California state income tax, you might need to work with a team of experts, such as a tax accountant, a financial advisor, a wealth manager, etc. Wealth managers at Pillar Wealth Management are experts in assisting clients looking to invest between 5 million to 500 million dollars. If you would like our expert insight on how you can manage your taxes, feel free to schedule a meeting with us.
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We enjoy working with high net worth and ultra-high net worth investors and families who want what we call financial serenity – the feeling that comes when you know your finances and the lifestyle you desire have been secured for life, and that you don’t have to do any of the work to manage and maintain it because you hired a trusted advisor to take care of everything.
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