Leaving California for Texas May Cause State Income Tax Headaches

Gray Reed
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Gray Reed

Shortly after I moved to Texas from Washington, D.C., a federal judge called me about a potential conflict with a party in a lawsuit I just filed. Once the conflict was resolved, and recognizing I didn’t have a Texas accent, he asked if I was new to Texas and then welcomed me. This was years ago and the numbers of those moving to Texas has only increased. California, in particular, seems to generate many newly minted Texans. The exodus from California is real and it involves high-profile moves like Elon Musk and hundreds of other Californians. The reasons for the exodus are usually cost of living and no state income taxes. However, the California Franchise Tax Board (FTB) is notoriously aggressive and may not let you go quietly. If you are new to Texas here is what you need to consider when making the breakup with California official.

FTB Determinations are Presumed Correct.

California taxpayers must appeal determinations made by the FTB to the Office of Tax Appeals (OTA). Decisions from the OTA almost always start by stating that it is well settled that determinations by the FTB are presumed correct and the taxpayer must show error in the decision. This means that, as a California taxpayer, it is your job to do the heavy lifting of gathering your evidence and showing how it meets the legal standards. The FTB has no duty to prove it is right, the taxpayer must show they are wrong.

California Residents Taxed on ALL Sources of Income.

If the FTB determines you are a resident of California then all income, no matter the source, is taxable. Non-residents are taxed on income from California sources, but full and part-year residents are taxed on all income earned while residents of the state of California. If a taxpayer wants to avoid income taxes in California, the first hurdle is to show they are no longer a California resident for part or all of the applicable tax year.

The Move Must be Permanent.

California “resident” is defined by R&TC Section 17014. This definition includes individuals who are in the state for “other than a temporary purpose” and individuals domiciled in the state who are outside the state “for a temporary or transitory purpose.” Also, according to California, a resident is still a resident “even though temporarily absent from the state.” A “domicile” is considered the “most settled and permanent connection” where a person intends to return. See Whittell v. FTB, 231 Cal.App.2d 278, 284 (1964). Further, if a taxpayer’s original home was in California it is presumed as their domicile unless there is a clear showing that it has changed. See In re Stephen Johnson, 2019-OTA-127. Maintaining a home in California, despite living elsewhere for the taxable year, can still result in a California residency determination because of the maintained connection. See In re David Gray, 2019-OTS-282.

Must Prove Texas is Closest Connection.

The state where a person has the “closest connection” during the taxable year is the state of residence. This means that the connections a taxpayer has, or maintains, with California are key. The connection is viewed using what are known as the Bragg factors, from a 2003 decision in California. These include registrations and filing in the new state (e.g. drivers license, voter registration, etc.), personal and professional associations (e.g. schools for children, business associations, membership in churches or social groups), and physical presence and property (e.g. rented or purchased home, telephone, origination of checking or credit card purchases). The regulations allow for an affidavit, so long as it is done under penalty of perjury, but that alone might be insufficient to overcome presumptions. Instead, a taxpayer is better off if they can produce the documentation listed above to show a permanent move and that their closest connection is to Texas.

Texas welcomes its new residents seeking refuge from California. However, individuals would be wise to make sure that the break is permanent and that they accurately document the change in residency and save that proof in case California tries to claim a portion, or all, of your income is taxable in California. If you are moving both yourself and your business you should check out my colleague’s blog posts on Considerations for Moving Your Business to the Lone Star State and Your Personal Checklist for your Move to the Lone Star State.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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