Do I Have to Pay California Income Tax if I Live Out of State?

California’s income tax system can be complex for individuals who reside outside the state but maintain connections within it. The state taxes income differently based on an individual’s residency status and where their income originates. Understanding these distinctions is important for properly determining tax obligations, as California taxes income earned within its borders, regardless of where a taxpayer lives. This often leads to questions about filing requirements for non-residents and part-year residents.

Determining Your California Residency Status

Your residency status for California tax purposes dictates what income the state can tax. A “resident” generally includes any individual who is in California for purposes other than a temporary or transitory stay, or someone domiciled in California who is outside the state for a temporary or transitory purpose. Conversely, a “non-resident” is any individual who does not meet the criteria for a resident. A “part-year resident” is someone who is a California resident for a portion of the year and a non-resident for the remainder.

Domicile refers to the place you intend to make your true, fixed, and permanent home, and to which you intend to return whenever absent. It is possible to be domiciled in California but reside elsewhere temporarily, or vice versa, which can complicate tax residency. The Franchise Tax Board (FTB) considers numerous factors when assessing residency, as no single factor is determinative.

Factors considered include:
Time spent in California versus outside the state.
Location of your principal residence, and where your spouse and children reside.
Your driver’s license, vehicle registration, and voter registration.
Primary bank accounts, financial transaction origination, and social ties, such as memberships in religious, professional, or social organizations.

The distinction between resident and non-resident is important because California residents are taxed on all income, regardless of its source, including income earned outside California. In contrast, non-residents are only taxed on income derived from California sources. Part-year residents pay tax on all worldwide income received while a California resident and on California-source income while a non-resident.

Identifying California-Source Income for Non-Residents

After establishing non-resident status, identify which income is “California-source” and subject to state taxation. California law specifies that non-residents are only taxed on income that originates from sources within the state. This principle applies regardless of where the non-resident lives or where the payment is received.

Wages and salaries earned for services physically performed within California are a common example of California-source income. This includes income from a business, trade, or profession carried on in California. If a non-resident performs services both inside and outside California, the income must be apportioned based on the ratio of days worked in California to total working days.

Income from real estate located in California is also considered California-source. This includes rental income from California properties and gains from the sale or transfer of California real estate. Gambling winnings can also be California-source. Income from patents or copyrights used in California is also California-source if they have a business situs in the state.

Certain deferred compensation or retirement income can be California-source if it relates to services performed in California while the individual was a resident or working in the state. Passive investment income, such as interest and dividends, from non-California sources is not California-source income for non-residents, unless the intangible property has acquired a business situs in California.

Calculating and Filing Your California Tax Obligation

After determining residency and California-source income, non-residents and part-year residents calculate their tax liability and fulfill filing requirements. California uses a specific method for computing tax for these individuals. Tax is calculated by first determining the tax on worldwide income as if a full-year California resident, then prorating that amount based on the proportion of California-source income to total income. This involves using forms such as Schedule CA (540NR) to adjust federal income for California differences and to identify California-source amounts.

Non-residents or part-year residents are required to file a California tax return, specifically Form 540NR, if their gross income from California sources exceeds certain thresholds, or if they have any California-source income that requires reporting. Form 540NR is used to report California-source income and compute tax obligations.

The Other State Tax Credit (OSTC) is for individuals who pay income tax to both California and another state on the same income. This credit aims to prevent double taxation, allowing taxpayers to offset the taxes paid to the other state against their California tax liability. To qualify for the OSTC, the income must be taxed by both states, and generally, California residents can claim the credit only if the income taxed by the other state also has a source within that state under California law.

For non-residents with significant California-source income not subject to withholding, estimated tax payments may be necessary throughout the year. This prevents potential underpayment penalties. The Franchise Tax Board (FTB) provides guidelines and forms for making these estimated payments.