In the year someone moves out of California, the usual status is part-year resident. In later years, the person is a nonresident. The two statuses reach different income, both are reported on Form 540NR, and in both cases some income can remain taxable by California after the move.
Three Residency Statuses
FTB Publication 1031 describes three statuses. Residents are taxed on all income, including income from sources outside California. Nonresidents are taxed only on income from California sources. Part-year residents are taxed on all income received while a resident and only on income from California sources while a nonresident.
A person who leaves California partway through a year is generally a part-year resident for that year and a nonresident in later years, assuming the move is a genuine change of residence.
Which Form to File
According to the Franchise Tax Board (FTB), both full-year nonresidents and part-year residents file Form 540NR, the California Nonresident or Part-Year Resident Income Tax Return.
How the Tax Is Computed
California does not simply apply its rates to California income. Under Revenue and Taxation Code (R&TC) section 17041(b), the tax is computed on the taxpayer’s entire taxable income as if he or she were a full-year resident, and that tax is then prorated based on the share of taxable income that is California taxable income.
For example, assume total taxable income of $200,000, of which $80,000 is California taxable income. The taxpayer computes the tax on $200,000 as if a full-year resident, divides that tax by $200,000 to find an effective rate, and applies that rate to the $80,000. Income earned outside California while a nonresident is not taxed, but it can affect the rate applied to California income.
The Move Date
Residency ends when the person leaves California for other than a temporary or transitory purpose. There is no single document that fixes the date. The FTB looks at the overall facts, including the factors listed in Publication 1031, such as the principal residence, driver’s license and vehicle registration, voter registration, the location of family, and where financial transactions originate. A move date supported by records created at the time is easier to defend than one reconstructed later.
Changing status from resident to part-year resident does not remove California’s claim to income received before the move. Income received while a resident remains fully taxable by California.
California-Source Income After the Move
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.
Employees who continue to work for a California employer after moving have California-source income to the extent they physically perform services in California. The FTB describes a workday method: California workdays divided by total workdays, multiplied by total compensation. For independent contractors and sole proprietors, the FTB explains that California-source income is determined by where the customer receives the benefit of the service, not where the work is performed.
Special Categories of Income
Equity compensation. Stock options and other equity-based compensation follow special rules in FTB Publication 1004, and they can produce California-source income after a move.
Installment sales. FTB Publication 1100 explains that California taxes installment gains received by a nonresident from the sale of property sourced to California, while installment gains from the sale of intangible property are generally sourced to the recipient’s state of residence at the time of the sale.
Retirement income. According to Publication 1100, California does not tax a nonresident’s IRA distributions or distributions from qualified pension, profit-sharing, and stock bonus plans.
The Bottom Line
The year of a move is usually a part-year resident year, and later years are nonresident years. Both are reported on Form 540NR, both use California’s prorated tax computation, and both require careful attention to income that remains California-source, including work performed in California, California property, and equity compensation tied to California service.
Moved out of California this year?
Tax attorney Cassra Minai, Esq. can review how California taxes your move year in a confidential consultation.