Is There an Exit Tax for Leaving California?
While California has no formal exit tax, moving away doesn't sever all financial ties. Learn how state tax law applies to your income after establishing residency elsewhere.
While California has no formal exit tax, moving away doesn't sever all financial ties. Learn how state tax law applies to your income after establishing residency elsewhere.
While California does not have a formal exit tax for residents who move away, the state maintains the authority to tax certain income earned even after you have left. A proposed wealth tax, which included a provision often called an “exit tax,” did not pass into law. However, the state’s aggressive approach to residency and income sourcing means that simply changing your address is not enough to sever financial ties.
When you cease to be a California resident, the state can no longer tax your worldwide income. Instead, its taxing authority narrows to what is known as “California-source income.” This principle means that any income generated from assets, activities, or business conducted within California remains subject to its income tax, regardless of where you live when you receive the payment.
A primary example of source income is the gain from selling California real estate, which California will tax even if you are a resident of another state at the time of the transaction. Similarly, rental income from California properties is considered California-source income and must be reported to the state. This applies to both residential and commercial real estate holdings.
Income from a business, trade, or profession conducted in California also remains taxable. If you move to another state but travel back to California for meetings or work assignments, the portion of your salary attributable to those workdays is taxable by California.
Deferred compensation, particularly equity like stock options and restricted stock units (RSUs), is also subject to sourcing rules. The taxable portion of this income is often allocated based on the time you worked in California. The Franchise Tax Board (FTB) will look at the period from when the equity was granted to when it vested to determine the amount of income sourced to the state.
Successfully ending your tax obligations to California requires more than just moving; it involves formally changing your legal residency. The California Franchise Tax Board (FTB) distinguishes between “residency” and “domicile.” Residency refers to where you are living for other than a temporary or transitory purpose, while domicile is the place you consider your permanent home and intend to return to after any absence. A person can have multiple residences, but only one domicile, and the burden of proof is on you to demonstrate you have changed it.
To determine your domicile, the FTB examines the location of your closest connections. This is not a single-factor test but a review of all evidence. Indicators include the state that issued your driver’s license, where your vehicles are registered, and where you are registered to vote. Other considerations include where your primary residence, spouse, and children reside, where you maintain bank accounts, and the location of your doctors, dentists, and attorneys. Moving professional licenses and social memberships to your new state further solidifies your case.
There is a specific provision for individuals leaving the state for work-related reasons. If you are outside California for an employment-related contract for at least 546 consecutive days (approximately 18 months), you may be considered a nonresident. This “safe harbor” rule has limitations, including a cap on the amount of intangible income you can receive during that period.
The year you move out of California, you are considered a part-year resident and have specific filing requirements. You must file a Form 540NR, the California Nonresident or Part-Year Resident Income Tax Return.
The purpose of the Form 540NR is twofold. First, it reports all your worldwide income for the portion of the year you lived in California. Second, for the period after your move, it reports only the income that is considered California-source income.
To complete this form accurately, you will also need to fill out Schedule CA (540NR). This schedule adjusts your federal adjusted gross income (AGI) for California tax law differences. It has columns to differentiate between your total income (as if you were a resident all year) and the income actually taxable by California, which includes all income as a resident and only California-source income as a nonresident.
Even in the years following your move, you may still have a filing requirement. If you continue to receive any California-source income, such as from the sale of property, rental income, or deferred compensation, you must file a Form 540NR to report that specific income.