Commonly Asked Tax Questions When Changing Residency from California to Nevada
You might have heard of the ‘California exodus’ and it is a very real trend that has made Nevada the fastest growing state in the United Sates for the second year in a row in 2020. According to current census data, ex-Californians now represent 20% of Nevada’s population, with nearly 100,000 Californians emigrating to Las Vegas in 2019 alone. For our friends currently navigating the waters of California & Nevada taxation laws, this article composed by David M. Grant, will answer some of the more commonly-asked California state income tax questions associated with changing residency from California to Nevada.
Current California Tax Laws
- Personal Income Tax: State taxes in California are known for being among the highest in the United States. As of 2018 California has ten (10) personal income tax rates ranging from 0% to 13.3%. Under current law, the highest rate of 13.3% begins at incomes of $1,000,000. The lowest rate is reserved for earners of less than $8,223 in annual taxable income.
- Federal Deductions: To add insult to injury, under current law, many federal deductions are now limited or disallowed in California. Moreover, California does not have reciprocity agreements with other states to allow non-residents to work there without paying income tax, except to their home state.
- Capital Gains Tax: A word on capital gains: Sadly, California state tax law does not include a special provision for capital gains tax. So unlike with U.S. tax law, you won’t receive a preferential rate for long-term gains on assets you hold onto for more than a year. This means that if you fall into that 13.3% bracket, you’ll also pay that same rate of tax on your capital gains.
What makes me a “resident” of California?
California defines a “resident” to include (1) every individual who is in California for other than a temporary or transitory purpose, and (2) every individual who is domiciled in California who is outside the state for a temporary or transitory purpose.4
Under California law, a person who stays in the state for other than a temporary or transitory purpose is a legal resident, subject to California taxation. Brief vacations or transactions in California—such as signing a contract or giving a speech—constitute temporary or transitory purposes that do not confer residency.
However, nearly every other kind of visit can confer such a status, including going to California for health reasons, extended stays, retirement, or employment that requires a long or indefinite period. The California Franchise Tax Board (“FTB”) even collects state income taxes from non-resident athletes and performers who earn any amount of money while in California.5
It seems clear that when former Californians completely relocate themselves—along with their families, spouses, children and all property—to Nevada and never return, then California has no further claim on them as residents.
What if I don’t sell my California residence?
What happens when someone doesn’t sell his residence in the former state and returns to it from time to time for vacations or other reasons? Perhaps an executive takes a new full-time job in Las Vegas, but his children continue to attend school and live with their other parent in San Diego? Or an owner of a business retires from day-to-day operations, moves to Reno, but continues to earn income from interests in her Sacramento-based company?
These questions are made tricky due to several factors:
- the absence of a bright-line test, the aggressiveness of the FTB
- the long-term nature of the FTB appeals process
- and the reality that subjective intent doesn’t count for much.
Unfortunately, only a few judicial decisions exist relating to the general questions of California residency.6
How does California determine whether a visit has a temporary or permanent purpose?
The 1985 case Corbett v. Franchise Tax Board listed 29 different factors that the FTB will use to determine residency.7 The author’s synthesis of the Corbett-Bragg factors, which might be used to evaluate whether the overall presence of an individual in California is temporary or permanent, is as follows:
- Physical presence:
- The number of days spent within the state of California weighed against the number of days spent within other states
- Where taxpayer receives bills and personal communications
- Where is the taxpayer’s point of departure and point of return with respect to vacations
- Where a taxpayer owns a second home in California, and sell’s without repurchasing the primary residence in another state
- Familial presence:
- Where taxpayer’s spouse/children reside
- Where children are born, married and raise their own families
- Where children attend school
- Where the taxpayer’s family receives medical and dental care
- Property presence:
- Location of owned and rented real property, and where real property is owned in multiple states, the respective size/value may be a factor
- Location of a home upon which taxpayer claims homestead and tax exemptions
- Location of vacation homes
- Location of burial plots
- Location of bank, checking, savings and credit accounts
- Location of safe deposit boxes
- Professional presence:
- Where taxpayer is employed and/or performs contracted services
- Where taxpayer is paid or receives substantial income
- Location of taxpayer’s family business or other business activities
- Where taxpayer serves as a director, officer or manager of a business
- Where taxpayer holds professional licenses and/or memberships
- Where taxpayer receives professional (i.e. legal, accounting, or investment) services
- Legal/Civic presence:
- Where legal documents (i.e. trusts, wills, powers of attorney, and contracts) are prepared and located
- Where legal documents are to be given effect
- Where tax returns are prepared and filed
- Location of taxpayer’s automobile insurance/registration
- Location of driver’s licenses for both taxpayer and spouse
- Where taxpayer and spouse are registered to vote
- Where taxpayer and/or other witnesses may swear—through affidavit—that taxpayer resides
- Location of membership in social, civic or religious organizations and where donations are made thereto
A recent legal victory9 coupled with innovative statutory law in the State of Nevada may provide hope that assets located in the State of Nevada are safe from the taxing authority of California. Even so, you may also want to do the following:
- Update estate planning and testamentary documents in Nevada and consider replacing California trustees, attorneys-in-fact, executors, and conservators with fiduciaries in other states;
- Establish a Nevada self-settled spendthrift trust pursuant to NRS 166 and transfer your assets thereto;
- Transfer your assets to a Nevada limited-liability company, limited partnership or closely held corporation to receive Nevada’s well-regarded charging order protection;
- File partial year and final state income tax returns in California at time of exit;
- Record a “Declaration of Domicile” affidavit pursuant to NRS 41.191; and
- Be aware of credit/debit card transactions, travel records, and other documented evidence which might prove time spent in California versus other states.
While no one “silver bullet” may exist for those seeking to put down the State of California, a move from the Golden to the Silver State, along with organizing one’s affairs in the manner indicated above, should be helpful in overcoming FTB residency challenges and unfair tax collection efforts.
© 2014-2015 State Bar of Nevada (updated 2019)
DAVID M. GRANT is an estate planning attorney at the law firm of Grant Morris Dodds, a law firm specializing in trusts, probate and guardianship, with offices located in Las Vegas and Henderson. Mr. Grant can be reached at (702) 357-5677 or email@example.com. The author gratefully acknowledges the editorial contributions of Mark A. Solomon, Esq., of Solomon Dwiggins & Freer, and Jason Aivaz, Esq. of Grant Morris Dodds.