Understanding the California Exit Tax

People who used to live in California but no longer do and make a certain amount of money could soon have to pay a small amount of taxes to California even though they don’t live there anymore. This suggested “Exit Tax” is part of the California wealth tax plan, which sets new rules for people or businesses with more than $30 million in assets at the end of the tax year.

Understanding What the California Exit Tax Is

The California Exit Tax says that if you or your business have lived in California full-time and make more than $30 million per year (or $15 million if a married taxpayer files separately from their spouse), 0.4% of the money you make from business, income, or investments made in the state would be taxed. This tax is paid once when you leave California.

Why California’s Exit Tax Has Been Proposed?

The California Exit Tax was created with two goals in mind. The state’s safety is the first goal. The idea is that California should get back the money it spent on things like tax breaks, financial incentives, and building facilities to help create this wealth. All of these were investments that the state made in businesses, people, or the general public with the hope that they would stay in the state long enough for the state to get the benefits of having the business there.

The second goal is to help close a capital gains gap that allowed people to avoid taxes by leaving California and selling their assets in another state. This kind of movement is not good for the state’s finances or for social order because it’s only purpose is to avoid paying taxes.

Assembly Bill 2088 now has the Exit Tax for these and other reasons.

Understanding the California Exit Tax

Who Has to Pay This Tax?

You have to meet two broad requirements for this tax to apply to you. First, you need to be able to make enough money. Second, you have to have been a resident of the state.

How Much Wealth do You Need?

If the value of your assets at the end of your tax year is more than $30 million (or $15 million if a spouse files separately), you may have to pay the Exit Tax. People who move to different parts of the country and whose tax year valuation is below this amount will not be impacted.

The Residency Requirement

The California Franchise Tax Board makes the rules that decide if a person lives in California or not. When figuring out if someone can live in California, they look at a lot of different things.

Some of these requirements are pretty obvious and easy to understand. These include:

  • Your home address with the most spaces
  • where your partner and children live
  • whether or not your children attend school in the California area,
  • How many days per year do you spend in California? If you or your family do not live in your home for most of the year, you cannot be considered a California resident.

But not all of the things the Franchise Tax Board looks at are so clear-cut, and the answer to any one question will not be enough to know for sure that the Franchise Tax Board will not consider you to have a certain amount of residency. Some of the less obvious things to think about when deciding if someone lives in California are:

  1. Are your vehicles registered in California
  2. Whether You Can Claim the California Homeowner Exemption on Your Taxes
  3. where your account statements or credit cards are sent
  4. what address is listed on your federal or local tax return
  5. whether you vote in California state elections

This is not a complete list of things to think about, but these are some of the things that go into figuring out a person’s tax situation in California based on where they live. Since whether or not you have to pay the Exit Tax would really come down to where you live, these things will become even more important if the Exit Tax is passed.

Understanding the California Exit Tax

What the Future Holds?

Even though a lot of people are more or less hopeful that the Exit Tax bill will pass, the current system is already very confusing. If you don’t figure out how much you owe in taxes properly, it can put a big dent in your plans for your business and your future.

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