Thousands flock to California each year for the beautiful weather, warm beaches and pleasant scenery. It is very common for a person to have a vacation home here while maintaining an entirely separate life in another state.
Unfortunately California’s Franchise Tax Board has an appetite for tax revenue, and if you’re not careful, you might just find yourself in a residency tax audit.
This is why it is so important to at least have a basic understanding of the rules determining residency and how California treats residents vs non-residents for tax purposes.
Residents of California are taxed on their worldwide income, from any and all sources.
For example, if you are a California resident and you own part of a New York LLC, you will pay California tax on your distributive share of the New York LLC income. The fact the income is earned entirely out of state is irrelevant. Non-residents are taxed only on their income derived from California sources. This includes income from investment property, rental income and income from partnerships.
So who is a resident?
Essentially the state will attempt to classify you as a resident if your stay in California can be considered other than “temporary or transitory,” or if your stay outside of California is “temporary or transitory,” while you still maintain a domicile in California. The answer to this question can be highly subjective. Consider a taxpayer with a second home in California whose main domicile in another state. At what point does the taxpayer become a resident of California? This is the question the Tax Court set out to answer in the Corbett v. Franchise Tax Board case in 1985. The key elements of the case were that the couple had a home, worked, filed resident tax returns, and banked in Illinois. However, the state was able to build a case which centered on the fact they spent between six and nine months in California each year. Ultimately the Corbett won the case and maintained their non-resident status in California.
This case set the precedent for future taxpayers trying to determine their residency status by enumerating 29 factors for taxpayers to consider.
|1. Birth, marriage, raising family||16. Driver’s license of taxpayer|
|2. Preparation of tax returns||17. Driver’s license of taxpayer’s spouse|
|3. Resident state income tax returns filed||18. Voter registration and actual voting|
|4. Payment and receipt of income||19. Charge accounts|
|5. Ownership and occupancy of custom built home||20. Predominant banking and financial accounts|
|6. Service as officer and employee of business corporation||21. Accountant, lawyer, and professional advisors|
|7. Holding of licenses for conduct of profession||22. Wills prepared and located|
|8. Ownership of family corporation||23. Education of children|
|9. Ownership and occupancy of vacation home||24. Majority of time spent in that State|
|10. Ownership of cemetery lots||25. Country club membership|
|11. Church attendance||26. Intended state of residence|
|12. Church donations||27. Presence of, and visits by, other family members|
|13. Church membership and committee participation||28. Social event attendance|
|14. Family doctors and dentist||29. Professional memberships|
|15. Car registration|
There are many facets of determining residency and the taxability of income. Consult your CPA if you are unsure of your tax residency status.