Tax question for part time Californians

[anothercog]

Still a few years away from FIRE but thinking about potential scenarios after I pull the plug.

For part time California residents, how do you manage/avoid CA income taxes?


If I were to establish residency in a no income tax state (e.g., Florida) but keep my home in CA and stay here for 4 months/year, will I pay CA income taxes on all my income or just 1/3 (4/12) of it?

Assuming all my income is coming from IRA withdrawals, if I don't take any withdrawals during the time I am in California, do I pay CA income taxes?

Obviously I'll get information ultimately vetted by a professional when the time comes but curious if anyone has any experience with this that can give me an idea of what to expect.

Thanks.

 

[cathy63]

You can only be a part-year resident if you are moving into or out of the state. You generally can't be a part-year resident year after year. Once you establish domicile in another state, then you become a non-resident for CA tax purposes and can visit here occasionally.

If you are a California resident, then you pay tax on all your taxable income even if it was earned outside the state. You get a credit for any tax you pay to another state. Since Florida has no income tax, that's not going to lower your CA tax bill. CA does not tax social security, but it does tax IRA withdrawals.

If you are not a California resident -- and you really need to read the FTB pubs carefully on how to become a non-resident -- then you pay tax on income earned from California sources. That would be rent received on CA real estate and proceeds from the sale of CA real estate. It could also include proceeds from brokerage accounts if you regularly initiate transactions while in the state.

You should also do a pro-forma return and see how much CA tax you will really owe after you retire. CA has a reputation as a high tax state, but that applies to high earners. You might be surprised to find out how low your CA taxes can be once you stop working.

 

[pb4uski]

I'm not familiar with California specifically, but am familiar with the topic... for both us and my mom for many years.

In the situation you describe since you will still keep a vacation home in California then you want to minimize all residential ties from California and treat Florida as your new residence.

We did something similar with Vermont, another fairly high income tax state in 2020. We registered to vote in Florida and notified our town clerk that we were no longer Vermont residents and should be taken off the voter lists. We got Florida drivers licenses and relinquished our Vermont drivers licenses. We insured and registered our car in Florida... but left registered in Vermont a truck that we leave there and use only while we are there. Our two watercraft and trailers that are used only in Vermont will continue to be registered there. We claimed Florida as our homestead and as part of that our town clerk verified that our former home was no longer had any homesteading benefits. We moved our main checking account to Florida... using a checking account with a Florida credit union that we previously had but that had little activity... we moved my pension direct deposit to that account as well as all of our autopays, pay our bills out of it, etc. We changed our home address to the Florida address for all bank accounts, financial accounts, credit card accounts, utility accounts, insurance policies, etc. We changed our Medigap policies to Florida. We announced the move in out 2020 Holiday letter and that we were now Florida residents. We will use our Florida address on our federal 2020 tax return and file a Vermont part-year tax return for 2020.

In short, just as if you moved and did not retain a California home or as if you were a Florida resident who bought and kept a California vacation property. So unless you have income producing property that is in California then you shouldn't have any California income.

You asked about taxes... putting the transitional part-year resident issue aside, we'll have no Vermont income and therefore no Vermont income tax in 2021 and beyond. However, if we owned Vermont income producing property (like rental real estate) we would have to file a non-resident return and would pay tax on that Vermont income.

For at least the first couple years, we'll keep careful records of the number of nights that we spend in Vermont to be sure that we are there for less than 1/2 a year.

And obviously, YMMV.

As to whether it is worth the effort there are things to consider other than income taxes... like the cost of car insurance, Medigap insurance, homesteading benefits, etc. for us, those things were good and bad but netted to a whole $222/year... so the main benefit for us is no state income tax.... and that is certainly not life changing but at the same time it isn't chump change either... enough for a few nice dinners out each month is we ever get to go out for dinner again.

 

[Chuckanut]

Friends of mine had sold their house and are living on there very nice boat (His and his wife's retirement gift to themselves.) They are using a relatives address in WA state that has no income tax as their official address.

They were going to spend 3 months in CA before sailing to Mexico because they have two children there. But, they found out if they spent more than 60 days with their boat docked at the same place, they might be listed as a resident of CA and they would be required to pay CA income tax. So they say. It's definitely something you want to understand completely.

 

[Montecfo]

As a former tax person, I always dreaded any entanglements with the state of California.

Very aggressive.

 

[calmloki]

+1. Cali came after me not once, but twice in the last 10 years. Had to point out that my doctors, rentals, cars and licenses, and voter registration as well as all taxes were in or paid to Oregon. Was real happy to add that I'd served on a Grand Jury up in Oregon that summer one year.

 

[pb4uski]

...But, they found out if they spent more than 60 days with their boat docked at the same place, they might be listed as a resident of CA and they would be required to pay CA income tax. ...

That doesn't sound right... if someone visited in California for 60 days in a hotel or AirBNB or the like they would not be considered residents and required to pay income tax.

 

[Freedom56]

We looked into that since we have a home in Southern California and a condo in Florida. To switch your residency from California to another state for income tax purposes, you have to switch everything over to the other state (driver's license, voter registration, bank accounts, address for pension deposits). You also have to spend most of your time in the other state. The FTB can audit your banking transactions and determine where your transactions were processed to determine how much time you have spent out of state and come after you for back taxes if they determine that you spent a significant amount of time in California. The cleanest way to do this is to sell your property in California and move to your destination state. In our case, we don't mind visiting our condo in Florida, but if we were to live there, we would want a house. Property taxes on a home comparable to what we have in Southern California would be about $16,000 per year versus the $6100 we are paying in Southern California. We are paying about $5840 property tax for a two bedroom condo in Florida. Home insurance is also extremely expensive in coastal areas of Florida.

 

[pb4uski]

I'm curious... what happens to someone's California property taxes if they keep their longtime home in California as a vacation home and move and change domicile to another state? Are the existing property tax benefits frozen and then adjusted from there as if a vacation home or are all residency benefits stripped away? Or something else?

That would need to be another part of the decision analysis.

 

[someguy]

As others have pointed out, if you have any income derived from or in CA, the FTB wants their part and you have to file a second state return (for CA). I'm not an expert -- and someone here can probably clarify further -- but my research and reading suggested that the aforementioned second (CA) return demands all your information, not just the portion from/in CA.

In other words, if you had large income or assets elsewhere and even a tiny amount from/in CA, CA and the FTB would know about all of the income and assets, even if only that tiny fraction was taxable to CA. It seems that would make you a very juicy target for a residency audit by CA FTB.

As far as time spent in CA versus state of tax residency/domicile, I think it's often incorrectly implied that as long as you spend six months and one day in the other state, you're guaranteed or automatically assumed to not be a CA resident. I believe the situation is rather that if you do not spend at least 6mo+1day in another state, you are automatically assumed to be a CA resident.

 

[cathy63]

I'm curious... what happens to someone's California property taxes if they keep their longtime home in California as a vacation home and move and change domicile to another state? Are the existing property tax benefits frozen and then adjusted from there as if a vacation home or are all residency benefits stripped away? Or something else?

That would need to be another part of the decision analysis.

If you stop using a property you own as your primary residence, then you lose the Homeowners exemption which discounts $7000 from the taxable basis, so your taxes will go up by ~$75 (exact amount varies by county). Your tax basis in the home will continue to go up by a max of 2% per year, though it can also go down if at any time your calculated basis exceeds the actual market value of the property.

It's the same whether your new residence is inside or outside the state.

 

[cathy63]

As others have pointed out, if you have any income derived from or in CA, the FTB wants their part and you have to file a second state return (for CA). I'm not an expert -- and someone here can probably clarify further -- but my research and reading suggested that the aforementioned second (CA) return demands all your information, not just the portion from/in CA.

In other words, if you had large income or assets elsewhere and even a tiny amount from/in CA, CA and the FTB would know about all of the income and assets, even if only that tiny fraction was taxable to CA. It seems that would make you a very juicy target for a residency audit by CA FTB.

As far as time spent in CA versus state of tax residency/domicile, I think it's often incorrectly implied that as long as you spend six months and one day in the other state, you're guaranteed or automatically assumed to not be a CA resident. I believe the situation is rather that if you do not spend at least 6mo+1day in another state, you are automatically assumed to be a CA resident.

Yes, CA FTB is known to be aggressive with people trying to claim residency in other states when they really live here. It's not just about how long you spend in another state, it's about what kind of ties you maintain. You can be in another place for more than 6 months, but if you continue to store your personal property here, leave your family here, make multiple trips here, then you can still be considered a resident.

Here's Pub 1031 that explains residency. There's a list of guidelines similar to the ones pb4uski gave above, but there's room for interpretation. It's not a checklist where you can "do these 10 simple steps and then you are free". https://www.ftb.ca.gov/forms/2019/2019-1031-publication.pdf

 

[cathy63]

Friends of mine had sold their house and are living on there very nice boat (His and his wife's retirement gift to themselves.) They are using a relatives address in WA state that has no income tax as their official address.

They were going to spend 3 months in CA before sailing to Mexico because they have two children there. But, they found out if they spent more than 60 days with their boat docked at the same place, they might be listed as a resident of CA and they would be required to pay CA income tax. So they say. It's definitely something you want to understand completely.

Do they still do any income producing work? 60 days is over the de minimis presence allowed by most (all?) states that collect income tax, so if they were earning money while in California for that long, they probably would be subject to non-resident income tax. If they weren't earning money and they had some other state where they "officially" lived, then they were being overly cautious. There are thousands of retired snow birds who spend winters in Palm Springs and don't pay state income tax.

 

[stepford]

As a current CA resident and aspirational snowbird I am very interested in this thread. Suppose I bought a summer house in a no-income-tax state like WA, lived there the majority of the year and changed all my license, vehicle and voter registrations to WA, but still spent 4 months (mid-December through mid-April) in CA.

Would CA still come after me for tax (other than the property tax on the CA house)? Would I really need to sell the CA house to avoid this?

 

[pb4uski]

Do they still do any income producing work? 60 days is over the de minimis presence allowed by most (all?) states that collect income tax, so if they were earning money while in California for that long, they probably would be subject to non-resident income tax. If they weren't earning money and they had some other state where they "officially" lived, then they were being overly cautious. There are thousands of retired snow birds who spend winters in Palm Springs and don't pay state income tax.

That makes sense... when I was working we had to code our time by where the work was done so I ended up havng to file numerous non-resident tax returns each year and claim the amounts paid (up to what I would have paid in my resident state) on my resident state return... but from what Chuckanut wrote it sounds like his friends were retired.

 

[pb4uski]

As a current CA resident and aspirational snowbird I am very interested in this thread. Suppose I bought a summer house in a no-income-tax state like WA, lived there the majority of the year and changed all my license, vehicle and voter registrations to WA, but still spent 4 months (mid-December through mid-April) in CA.

Would CA still come after me for tax (other than the property tax on the CA house)? Would I really need to sell the CA house to avoid this?

You're really not asking the right question. Would they come after you? Perhaps. But the more important question is whether they would prevail and in the situation that you wrote they would NOT prevail.

If you do the right things to sever your California ties other than having a (vacation) home there, then you should be able to avoid California state income tax... just be prepared to be challenged and stare down the bear.

Your mindset and actions really needs to be that you have moved, lock, stock and barrel to WA but that you kept a property in CA for vacation/pleasure.... as if you lived in WA and then bought the CA vacation property.

If you sell the CA house then it is a much cleaner break. I know some people who sold their house and rent a condo for the time that they spend in their old state and others that sold their house and spend the summer in a nice 5th wheel in a nice campground with a minature golf course, two swimming pools, fishing ponds and all the amenities... but in both cases not owning real property in their old state and owning property in their new state bolsters their case that they are no longer domiciled there.

 

[cathy63]

That makes sense... when I was working we had to code our time by where the work was done so I ended up havng to file numerous non-resident tax returns each year and claim the amounts paid (up to what I would have paid in my resident state) on my resident state return... but from what Chuckanut wrote it sounds like his friends were retired.

Well, I know lots of people, some of them right here on this forum, who are "retired" but still earn money by consulting, doing handyman type jobs, selling handcrafted items, writing blogs or books or newspaper columns, etc. They may not think of it as working, but the state will still want their cut.

 

[Green Papaya]

Well, I have the opposite scenario.

If I do a Roth conversion, let's assume $120K, in February 2021 while living in TX. Then in October 2021 I move and establish residency in CA. Would I be on the hook for CA tax on 1) $120K income or 2) $30K (for the 3 months I will be a CA resident) or 3) $0 since the Roth conversion occurred before I become a CA resident? Anyone has a similar experience?

 

[Mr. Tightwad]

That doesn't sound right... if someone visited in California for 60 days in a hotel or AirBNB or the like they would not be considered residents and required to pay income tax.

I'm not a tax expert like 2nd Cor and Cathy is, but there is a law that says if you spend 60 days in CA, whether its to visit, vacation, or if you are in a hospital, the reason doesn't matter, you pay CA state taxes.

We are also on the verge of getting wealth taxes and taxing those that leave the state (for 10 years).

 

[MichaelB]

I'm not a tax expert like 2nd Cor and Cathy is, but there is a law that says if you spend 60 days in CA, whether its to visit, vacation, or if you are in a hospital, the reason doesn't matter, you pay CA state taxes.

We are also on the verge of getting wealth taxes and taxing those that leave the state (for 10 years).

Do you have a source for either of these two claims? Specifically on the second, is this a proposal under legislative consideration or is this tilting at windmills?

 

[Mr. Tightwad]

http://www.wsj.com/articles/a-california-plan-to-chase-away-the-rich-then-keep-stalking-them-11608331448

 

[Peter]

http://www.wsj.com/articles/a-calif...-the-rich-then-keep-stalking-them-11608331448

That bill died as far as I know.
https://tinyurl.com/y2oppyj4

 

[MichaelB]

http://www.wsj.com/articles/a-california-plan-to-chase-away-the-rich-then-keep-stalking-them-11608331448

A naked link with no explanation? Thanks. It’s an opinion piece, not a news source, and the bill in reference has been drafted but is not under active consideration by the Ca. legislature.

The other part of your post, about anyone spending 60 days in California being subject to state income tax, would also benefit from a link.

 

[omni550]

A few years ago I attended a lecture (mostly pitched at snowbirds) on declaring residency in FL.

They listed many things (like pb4uski cited in post #3 above) that "sticky" states will check to determine whether your claim of not being a "sticky" state resident is valid.

Another item that is often overlooked is a "sticky" state will pull your cell phone records during an audit to see which towers your cell phone has been pinging on during the year. This quickly reveals where you are actually spending your time.

omni

 

[cathy63]

Well, I have the opposite scenario.

If I do a Roth conversion, let's assume $120K, in February 2021 while living in TX. Then in October 2021 I move and establish residency in CA. Would I be on the hook for CA tax on 1) $120K income or 2) $30K (for the 3 months I will be a CA resident) or 3) $0 since the Roth conversion occurred before I become a CA resident? Anyone has a similar experience?

Option 3) $0. During the year that you move into the state you are taxed on income received while you are a California resident and on income received from California sources. A Roth conversion that occurs before you move into the state is not income from a California source.