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October 2, 2017

Understanding Residency Status in California

by Team Rowling

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.

This is a road sign that says, Welcome to California

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.

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