California Tax After Leaving: Rules and Requirements

Leaving California does not automatically end your tax obligations to the state. The Franchise Tax Board (FTB), California’s tax agency, is known for its thorough approach to ensuring former residents pay what they owe. Even after you move, you may still be required to pay California taxes on certain types of income or if the state still considers you a resident for tax purposes. Understanding California’s residency rules is necessary to avoid unexpected tax bills long after you have settled in a new state.

Determining Your California Residency Status

Understanding your residency status is the foundation of your tax obligations. California law distinguishes between “residency” and “domicile.” Your domicile is your true, fixed, permanent home and the place to which you intend to return whenever you are away. An individual can only have one domicile at a time, but residency refers to being in California for purposes that are not temporary or transitory.

The FTB determines your status by examining the facts and circumstances of your situation, applying a “closest connections test” to see which state has stronger ties. The state where you spend the most time is a significant consideration. The FTB will also look at where your spouse and children reside, as this is a strong indicator of your center of life. Other factors in the closest connections test include:

• The location of your primary bank accounts.
• Where you are registered to vote.
• The state that issued your driver’s license and vehicle registrations.
• The location of your doctors, dentists, accountants, and attorneys.
• The state where you maintain professional licenses.
• Where you participate in social, religious, or athletic clubs.

The burden of proof is on you to demonstrate that you have severed your California ties and established a new domicile elsewhere. The FTB presumes you remain a California resident if you maintain significant connections to the state. For example, if you move for a temporary work assignment but your family remains in your California home, the FTB will likely consider you a resident subject to tax on your worldwide income.

Taxation of Nonresidents and Part-Year Residents

Once you are no longer a California resident, the state can only tax your “California-source income.” This is income that originates in California, regardless of where you live when you receive it. A common example is wages for services performed in California, such as commuting to a California job from another state.

Income from real estate located in California is another example, including rental income or capital gains from its sale. Income from a business, trade, or profession conducted in California is also subject to state tax. This applies whether you are a sole proprietor or a partner in a business operating within the state.

Individuals who move during the year are “part-year residents.” You are taxed differently for the portion of the year you lived in California versus the portion you lived elsewhere. During your residency period, California taxes your entire worldwide income. For the period you were a nonresident, you are only taxed on your California-source income, requiring careful allocation of income.

Key Income Types with Special Rules

Certain types of income have specific sourcing rules that can create tax obligations for former residents long after they have moved.

Stock compensation, such as Restricted Stock Units (RSUs) and stock options, is a common issue. California sources this income based on the proportion of workdays you spent in the state between the grant and vesting dates. If half of the workdays in your RSU’s vesting period were in California, half of the income is considered California-source income when it vests, even if you live elsewhere.

Retirement income, like pensions and 401(k) distributions, is sourced to your state of residence when you receive the payments, as federal law prohibits states from taxing the retirement income of nonresidents. However, certain non-qualified deferred compensation plans may be an exception, sourced based on where the services were performed.

Income from pass-through entities like partnerships, S-Corporations, and LLCs that operate in California is also subject to specific rules. If the entity does business in California, a portion of its income is apportioned to the state. As an owner, you must pay California tax on your share of the income apportioned to the state, regardless of where you reside.

Steps to Formally Change Your Residency

To effectively change your residency for tax purposes, you must take clear actions to sever your ties with California and establish new ones in another state. These actions should align with the factors the FTB examines in its “closest connections test.”

A primary step is to obtain a driver’s license in your new state and register your vehicles there. You should also register to vote in your new location and remove your name from California’s voter rolls. These are official acts that signal your intent to make the new state your permanent home.

Updating your financial and legal documents is also necessary. Change your mailing address on all bank and investment accounts, credit cards, and insurance policies. If you have an estate plan, such as a will or trust, you should update it to reflect the laws of your new state of residence.

Physically moving your personal belongings, especially items of high sentimental or monetary value, is another indicator. You should also formally notify professional organizations and licensing boards of your change of address. Subscribing to local publications and joining community groups in your new location can further demonstrate your intent.

California Filing Requirements After You Leave

After moving from California, you may still have a requirement to file a state tax return. This obligation depends on your residency status and whether you received any California-source income.

If you were a part-year resident or a nonresident with California-source income, you must file a California Nonresident or Part-Year Resident Income Tax Return (Form 540NR). This form is designed to calculate your tax liability based on the income subject to California tax.

A component of this filing is Schedule CA (540NR), California Adjustments — Nonresidents or Part-Year Residents. This schedule is used to determine your California-source income by starting with your federal adjusted gross income. It helps separate your income into California and non-California sources to calculate your final tax.

Once the forms are complete, you can submit your return electronically or by mail. E-filing is the fastest and most secure method.