Nevada, Texas, and Florida do not impose a state personal income tax, which makes them common destinations for Californians. A move can reduce state income tax going forward, but California continues to tax some income after the move, and the timing of the move and of major transactions matters.
What Changes When Residency Changes
FTB Publication 1031 explains that California residents are taxed on all income, nonresidents only on income from California sources, and part-year residents on all income received while a resident plus California-source income received while a nonresident. In the year of a move, the taxpayer is generally a part-year resident and files Form 540NR.
California computes the tax for a part-year resident or nonresident on total taxable income as if the person were a full-year resident and then prorates it based on California taxable income (Revenue and Taxation Code (R&TC) § 17041(b)). Income earned elsewhere after the move is not taxed by California, but it can affect the rate applied to California income in the year of the move.
Residency Must Actually Change
A Californian who is outside the state for a temporary or transitory purpose remains a resident (R&TC § 17014). The Franchise Tax Board (FTB) evaluates a move using the factors in Publication 1031, including time spent in California, the location of a spouse or registered domestic partner and children, the principal residence, driver’s license, vehicle registration, voter registration, bank accounts, where financial transactions originate, professional licenses, medical and professional advisers, social ties, real property, and the permanence of work in California. An individual who spends more than nine months of a taxable year in California is presumed to be a resident (R&TC § 17016).
A move is most defensible when these connections actually shift to the new state, and when the move date is supported by records created at the time.
Income California Still Taxes
According to the FTB, California-source income includes compensation for services performed in California, rent from California real property, gain from the sale or transfer of California real property, and income from a California business, trade, or profession.
Remote workers who continue to work for a California employer have California-source income to the extent they physically perform services in California; the FTB explains that one way to compute it is a ratio of California workdays to total workdays. Independent contractors and sole proprietors have California-source income where their customers receive the benefit of the services, regardless of where the work is done.
Moving does not end California’s claim to income connected to California. Work performed in California, California real estate, and a California business remain within California’s reach after the move.
Timing Major Transactions
Sales of California real property. Gain from California real property is California-source even if the seller has moved. FTB Publication 1100 explains that California taxes installment gains received by a nonresident from the sale of property sourced to California.
Sales of stock and other intangibles. Publication 1100 explains that installment gains from the sale of intangible property are generally sourced to the recipient’s state of residence at the time of the sale. Because the answer depends on where the seller was a resident when the sale occurred, the order of the move and a large sale deserves careful planning, and special rules can apply.
Equity compensation. The FTB notes that a person who has moved may still have California-source income from deferred or equity-based compensation, which is governed by special rules in FTB Publication 1004.
Retirement income. Publication 1100 explains that California does not tax a nonresident’s IRA distributions or distributions from qualified pension, profit-sharing, and stock bonus plans.
Keeping California Ties
Many people keep some connections to California, such as a home, a business interest, professional licenses, or family. None of these automatically makes someone a resident, but each is a factor the FTB considers. Keeping them while claiming a change of residence calls for especially careful documentation of where the person actually lives and spends time.
After the Move
Tracking days spent in California, keeping travel records, and maintaining the records that show the new home and connections are the most useful steps after a move. The FTB generally has four years after a return is filed to propose an assessment (R&TC § 19057). If no California return is filed for a year that the FTB later determines was a resident year, there is no time limit (R&TC § 19087).
The Bottom Line
A move to Nevada, Texas, or Florida can reduce future state income tax, but only if residency genuinely changes, and California continues to tax California-source income. Planning the move date, the timing of large transactions, and the documentation of new connections before the move is far easier than reconstructing them during an audit.
Planning a move out of California?
Tax attorney Cassra Minai, Esq. can review the tax issues in your relocation plan in a confidential consultation.