California’s Exit Tax Explained - The Full Guide
California is the wealthiest U.S state by quite a margin. Home to the movers and shakers of the world, Hollywood is where a big chunk of this wealth resides. In August of 2020, California introduced Assembly Bill 2088 (Bill AB 2088) and it has ruffled the feathers of its wealthiest residents. AB 2088 is, at its core, a wealth tax, so you can imagine the outcry and concern as it came into effect in the wealthiest state of America.
In Bill AB 2088 there are a few different taxes at play, but none are more controversial than the Califonia exit tax. In this article, we will highlight exactly what the Golden State’s exit tax is all about. Also discussing how it will affect this overhaul of California’s tax code is likely to affect its residents and how it has set a precedent for taxing the wealthy.
What is California’s Wealth Tax?
California’s exit tax is part of the state’s wider tax on the wealthy - termed the “Wealth Tax”. California proposed a bill that would tax its residents on the value of their wealth and it was approved in Sacramento in August of 2020.
Bill AB 2088 imposes a 0.4% tax on all Californian residents worldwide net worth that exceeds $30,000,000. If a married taxpayer is to file separately from their spouse then this figure would be cut in half down to $15,000. As you can see where most ordinary people are concerned, this wealth tax is of no concern. The wealth tax is calculated on an annual basis, meaning a resident would have to earn over $30,000,000 in a single year to qualify.
Bill AB 2088 relates to worldwide net worth that references specific federal provisions. It does not include various types of assets including property. The bill also allows the Franchise Tax Board to carry out provisions and adopt regulations that detail the value of non-publicly traded assets. This includes certain assets acquired outside of Californian borders as well.
Also read: Are Bonuses Taxed Differently?
What is California’s Exit Tax?
The other part of California’s tax on the wealthy is the exit tax. The exit tax is where many of the state’s wealthy residents think that California has crossed a line and there will no doubt be some high-flying court battles to follow in the coming years.
Why has the exit tax in particular got the rich and famous up in arms you ask? It boils down to California taxing their wealthiest residents for up to ten years after they have left the state. The exit tax has foiled the plans of the mega-wealthy who were deciding to fly the coop before the wealth tax came into effect.
Why Has California Introduced the Exit Tax?
California has introduced these taxes on the wealthy because its tax base has shrunk quite significantly. From 2010, the state’s tax base shrank by a whopping $24.6 billion which, even by Californian standards, is significant. This loss in taxes can be primarily put down to a loss in residents, and, therefore, their income taxes.
However, many residents and observers believe they have missed the point. Instead of addressing the cause of this mass exodus, they have decided to rule with an iron fist and make it even more challenging for residents. Of course, the exit tax only affects the wealthiest, but it doesn’t look good or set a good precedent for what is to come.
How Does California Determine Residency?
The agency that is tasked with determining who is classed as a Californian resident and who is not is the Franchise Tax Board. To determine this ruling, the Franchise Tax Board will scour over 19 preordained factors. This is what they tend to call the “closest connection test”. The closest connection test is tasked with determining residency status by examining the economic and community relations of residents.
A few of these factors include but are not limited to:
Where a resident’s spouse and children reside
The location of a resident’s largest residential property
Where a resident’s children go to school
Where a resident claims their homeowner’s property tax exemption
A resident’s credit card account statements
The number of days that a resident spends on an annual basis in California
The residency that is listed on a resident’s tax returns (both federal and local)
Where a resident typically votes
Where a resident has their vehicles registered
Where a resident visits their doctor or dentist
The Franchise Tax Board gives each of these determining factors a specific value. These values are then tallied up to determine the residency status of the individual in question.
Also read: File Taxes for the First Time
What if a Resident Has Already Left California?
If a person has already left the state of California but continues to have financial ties to the state, under the California Revenue and Tax Code 17591 they are still required to pay state income tax. This income tax is only relatable to income earned within California, but it is still a thorn in the shoe of the wealthy.
An example of this would be when a resident moves to another state but continues to run a business or buy and sell property within the state - it is these types of ventures would be taxed. California uses the principle of “source income” to figure out exactly who is obliged to pay state taxes which now include Bill AB 2088.
Also read: Is Rent Tax-Deductible?
As is evidenced by this article, California certainly isn’t afraid to be controversial. The Golden State’s need to regain its lost taxes over the last 10 years has resulted in the wealth and exit tax. Whether you agree with it or not, there is no denying that it is a controversial move that will see them battling with their wealthiest residents for many years to come.
We hope this article has been an insightful look into California’s exit tax and has answered your question once and for all.
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Also read: Are Moving Expenses Tax Deductible?