It goes without saying that an individual is free to move about the country and to change their state of residency/domicile for state income tax purposes. However, that change is potentially complex under the law, especially when an individual who is a longtime resident/domiciliary of California plans to become a nonresident. California, at 13.3%, has the highest personal income tax rate of any state, and that revenue stream is important because typically approximately 70% of California’s total annual tax revenue comes from the personal income tax. Even with this high rate, proposals are constantly being floated to increase that tax burden. For example, bills from last year’s California legislative session would have imposed a new “wealth tax” (Assembly Bill 2088) and would have increased the top personal income tax rate to 16.8% (Assembly Bill 1253). Governor Newsom has stated he does not favor any tax increases in the current legislative session, but time will tell. In any event, the current California tax climate and the risk of yet higher rates has contributed to an increase in the number of California residents who wish to relocate, frequently to a no income tax state.
California law defines “resident” for tax purposes as every individual (1) who is in California for other than a temporary or transitory purpose, and (2) every individual domiciled in California who is outside California for a temporary or transitory purpose. (Cal. Rev. & Tax. Code § 17014(a).) There is a rebuttable presumption of California residency when an individual is present within California for more than nine months of a taxable year. (Cal. Rev. & Tax. Code sec. 17016.) However, the converse is not true, i.e., there is no presumption of nonresidency when a taxpayer spends less than nine months of the year in California.
Regarding domicile, an individual who is domiciled in California and leaves the state retains his or her California domicile as long as there is a definite intention of returning to California, regardless of the length of time or the reasons for the absence. In order to change domicile from California, a taxpayer must: (1) actually move to a new residence; and (2) intend to remain there permanently or indefinitely.
Regarding residency, the underlying theory is that the state with which a person has the closest connection during the tax year in issue is the state of their residence. The specific facts of the case are all important. Appeal of Bragg (2003-SBE-002), which is a 2003 administrative decision, identifies nineteen objective factors to consider in determining whether an individual’s “closest connection” is to California or another state. Thus, Bragg is a common starting point for any factual analysis in a residency case, including an analysis, which takes place during an FTB audit. The Bragg factors are commonly organized into three categories:
Registrations and filings with a state or other agency, including:
• Homeowner’s property tax exemption
• Automobile registration
• Driver’s license
• Voter registration/participation history
• Address used and state of residence claimed on federal/state tax returns
Personal and professional associations, including the state of the taxpayer’s:
• Employment
• Children’s school
• Bank and savings accounts
• Memberships in social, religious, and professional organizations
• Use of professional services, such as doctors, dentists, accountants, and attorneys
• Maintenance/ownership of business interests
• Professional license(s)
• Ownership of investment real property
• Presence/connections/residency as indicated by third-party affidavits/declarations
Physical presence and property, including:
• Location and approximate sizes and values of residential real property
• Where the taxpayer’s spouse and children reside
• Taxpayer’s telephone records (i.e., the origination point of taxpayer’s telephone calls)
• Origination point of the taxpayer’s checking account/credit card transactions
• Number/general purpose (vacation, business, etc.) of days the taxpayer spends in California versus other states
Applying the law to the specific facts of a case is often complicated. Bragg itself is clear that no single factor above is dispositive and that this is not to be read as an “exhaustive list.” However, in practice and over time, some factors—such as day counts, the location of residential real property, and where the taxpayer’s spouse and children reside—have taken on more importance and significance than other factors—such as driver’s licenses, registering to vote, and the location of investment property.