Recent reports and statistics showed that many Californians are packing up and moving out of state. Even Elon Musk, founder of Tesla, recently announced that he is moving from California to Texas. While many are speculating that the billionaire has chosen to leave California because of the exorbitant taxes, Musk is claiming is that his move is due to Covid-19 restrictions. But yes, high taxes and high cost of living has been the main drivers why people are leaving the sunny state behind.
Statistically speaking, California has always had high taxes as compared to other states, with high income taxes up to 13.3%, big sales taxes amounting to as much as 9.5% in Los Angeles and high real estate values. While 2018 may seem like a lifetime ago, a monumental change that year made paying state tax considerably more agonizing for highly paid workers and numerous property holders. 2018 was the year the Trump Tax Plan became effective, which added up to unfortunate increase in taxes for some mid to higher paid workers in states like California, New York, and New Jersey. The surge in taxes has really prompted a lot of people to realize how much money they need to pay to continue living the California dream compared to other people in most states.
But if you think, moving out of the Golden state will solve all your high tax problems may not always be the case. California has a progressive tax system, wherein your marginal tax rate increases as your income does, so some workers are seeing that their taxes increased even after moving to another state. While some other states may have lower flat tax rates compared to others, however, that rate begins from the first dollar of income, thus, resulting in a higher total tax bill. Unless you are relocating to the following states who have no income taxes – Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
But can California still tax you even after leaving the state? Surprisingly, yes. That’s why timing and caution in how you plan out your move can be crucial especially if the California’s Franchise Tax Board gets a whiff of your move. Fortunately though, there is a fine print for specific people leaving California under work related agreements. It states that an individual residing in California, yet working outside the state under a business related agreement for a continuous time of at any rate 546 successive days, will be viewed as a non-resident unless either,
1. The individual has intangible income exceeding $200,000 in any tax year during which the employment-related contract is in effect; or
2. The main purpose of the absence from California is to avoid personal income tax.
The spouse of the individual covered by the safe harbor can also qualify. In the event that you fail to meet the qualifications for the safe harbor, the residency status will be based on facts and circumstances. A person living and residing in California for more than nine (9) months is presumed to be a resident of the state. On the other hand, if your job requires you to be outside California, it usually takes 18 months to be presumed to be no longer a resident.
If leaving California behind because of high tax rates is your principal reason, be sure to take into consideration the full cost of living comparisons. With lower tax rates might give you a bigger take home pay and allows you to buy a much larger house for less in another state, you might also end up with a higher property tax bill. Normally, States with lower income tax rates often have higher property tax rates. While there could be a myriad of reasons why people are leaving California behind, income taxes are just part of the equation. So be sure to plan carefully and get professional advice when moving out of state.