Can California Tax You After You Leave the State?

Relocating from California does not automatically end your tax obligations to the state. California’s tax authority, the Franchise Tax Board (FTB), has specific rules for determining who is a resident for tax purposes. Even after you have physically left, you may still be considered a resident or have tax liabilities on income originating from within the state. Former residents can be surprised to find they still owe California taxes years after moving, as the financial consequences of a misstep can be substantial.

Understanding California Residency for Tax Purposes

California’s ability to tax an individual is based on “residency” and “domicile,” which have distinct meanings for tax purposes. Your residence is where you live, and it is possible to have multiple residences. Domicile is the one location you consider your permanent home—the place you intend to return to after any temporary absence. An individual can be a resident of California for tax purposes even if their domicile is elsewhere.

California law defines a resident as anyone in the state for other than a temporary purpose, or anyone domiciled in California but outside the state for a temporary purpose. You are presumed to be a resident if you spend more than nine months of the year in the state. The FTB’s analysis determines where you have the “closest connections” through a fact-based examination of numerous ties to determine your true domicile.

The FTB considers several primary factors in its closest connections test, including:

• The location of your spouse and children
• The location of your principal residence
• The state that issued your driver’s license
• The state where your vehicles are registered
• Where you are registered to vote

Beyond these primary connections, the FTB also considers secondary factors. The location of the banks where you maintain accounts is a consideration. The analysis extends to where you receive professional services from doctors, dentists, accountants, and attorneys. Social ties, such as affiliations with religious institutions, social clubs, or professional associations, are also scrutinized. No single factor is determinative; instead, the FTB evaluates the totality of your circumstances.

Taxation of California-Source Income

Even after establishing domicile in a new state, your tax obligations to California may not be finished. The state taxes nonresidents on income from California sources. This means earnings from activities, property, or business in California remain subject to its income tax, regardless of where you live.

Compensation for personal services performed in the state is a common example of taxable California-source income. If a consultant living in another state travels to California for a project, the income earned for the days worked there is taxable. Rental income from real estate in California is always considered California-source income, and the sale of that property will generate a capital gain that is also taxable by the state.

Income from a business, trade, or profession carried on within California is also subject to state tax. Furthermore, deferred compensation can create a lasting tax connection. Income like stock options or retirement benefits earned or vested while you were a California resident may be taxable by California when you receive the funds, even if you are a nonresident.

The sourcing rules can be complex for intangible assets or installment sales. For instance, gains from an installment sale of property located in the state are taxed by California, with payments remaining taxable for years after the move. The FTB provides guidance to help taxpayers allocate income between California and their new state of residence.

The California Residency Audit

The FTB enforces its residency rules through residency audits. These are detailed examinations designed to determine whether a taxpayer has truly severed their ties with California or if they remain a resident for tax purposes. The FTB is vigilant about taxpayers who relocate, and certain actions can increase the likelihood of triggering an audit.

Several red flags can prompt an audit. A high-income individual moving to a state with no income tax is a common trigger. Filing a part-year resident return (Form 540NR) that shows a significant drop in income after the move-out date can also attract scrutiny. Maintaining significant connections to California can also lead the FTB to question a change in residency. Discrepancies between federal and state filings can also trigger an audit.

If selected for an audit, you will receive a notice from the FTB, followed by a request for documentation to prove your non-residency status. Auditors will scrutinize bank and credit card statements to track your physical location, review property records, and examine travel itineraries. They may also look at utility bills, cell phone records, and social media activity to build a timeline of your whereabouts.

The burden of proof is on the taxpayer to demonstrate they are no longer a California resident. If the FTB concludes you are still a resident, it will issue a notice for the additional tax, penalties, and interest owed. Taxpayers have a right to protest this finding, but the process can be lengthy and complex.

Actions to Establish Non-Residency

Demonstrating a change of domicile requires taking documented actions that show an intent to leave California and establish a new permanent home. These steps are practical measures that create a factual record to support your claim of non-residency in the event of an FTB audit. The goal is to replace your California-based connections with new ones in your new state.

Changing your official government registrations is a primary step. You should:

• Obtain a driver’s license in your new state and surrender your California license
• Register your vehicles in your new location
• Register to vote in your new state
• Unregister to vote in California to avoid ambiguity

Physically moving your personal belongings, including items of high sentimental value, indicates a permanent relocation. Selling a home in California is strong evidence that you do not intend to return. If you keep a residence in California, the FTB may argue it is your primary home, especially if it is larger or more valuable than your new one.

You should also update your address across all financial and personal accounts. This includes notifying the FTB of your new address by filing Form 3533, Change of Address for Individuals. You must also update your address with banks, credit card companies, insurance providers, and the Social Security Administration. Revising your estate planning documents, such as wills and trusts, to reflect your new state of domicile is also advisable.