Does California Have An Exit Tax?

It is no secret that there has been an exodus of people from California. And when people leave the Golden State, others have claimed that they will face an exit tax from the Franchise Tax Board (FTB).

However, this is simply not the case. There is no such thing as an exit tax. But if you leave the state of California, there are a few situations where they can still tax you. They are listed as follows.

You leave, but still have assets in California

If you find residence elsewhere, the FTB can still tax you on income from California sources. These sources can include California rental properties, or sales of California homes.

You leave, but are considered a part-time resident in California

There are many people who leave the Golden State, but still own a house there. And while they are a resident of the new state, they still spend significant time in California.

In this scenario, the FTB may consider you a part-time resident, and they will impose a state tax on two types of income. The first is income received as a state resident. And the second is on California-sourced income when you are not living there.

You leave, but the FTB determines that you’re still a California resident

If you move out of California, but still have property and assets there, the FTB could find that you’re still a California resident. And in this situation, the FTB could tax your worldwide income, even if it comes from out of state.

How to avoid this

It is no secret that the FTB is aggressive in its collection efforts on its residents who leave. And in recent years, these efforts have only ramped up. In 2023 alone, they completed 520 audits on out of state residents. This is up from the 230 that they completed in 2019.

If you leave the state of California, the last thing you want to face is an audit from the FTB. So, what can you do to avoid it? The easiest thing you can do is by following the FTB’s “close connection” test. This test determines which state is your true primary residence, and it applies to people who either sell or keep their California homes.

The “Close Connection” Test

This test determines which state is your primary residence by looking at how strong your ties are to California and your new state. And they do so by looking at the following factors:

• Amount of time you spend in California vs. the amount of time you spend outside of California
• The location of your spouse and children
• Location of your principal residence
• State that issued your driver’s license
• State where your vehicles are registered
• State where you maintain your professional licenses
• State where you are registered to vote
• Location of the banks where you maintain accounts
• The origination point of your financial transactions
• Location of your doctor, dentist, lawyer, and accountant
• Location of your church, professional association, social club, or country club
• Location of your real property
• Location of your investments
• Permanence of your work assignments in California

But the two most important factors the FTB looks at are as follows:

1. The size of your homes in California and the other state

The FTB will compare the size of your home in California, and the size of your home in the state you just moved to. If the home in your new state is larger, then the FTB will likely consider you a resident of that state. That is, if you also follow the second factor.

2. The number of days spent in each state

The second important consideration is the number of days you spend in your new state, and the number of days you spend in California. If you spend more than 6 months in your new state, and less than 6 months in California, then the FTB will consider you a resident of the new state. However, it is best practice to avoid any close calls. This means that instead of six months and a day, make it six months and two weeks.

After looking at all these factors, if the FTB determines that the strength of your ties is greater in the new state, then you will not be considered a California resident. And the best way to bolster your case is by following the last two.

Conclusion

While there is no such thing as an exit tax, California can still impose taxes on its residents that leave. And if you don’t want to face any additional taxes after you leave, then it would be best to abide by all the factors in the “close connection” test.