Haute Lawyer, Samuel Landis, picks up where he left off on California Gold Part 1 and explains how to establish a new domicile away from California.
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The State of California seeks to classify individuals as residents of California in order to subject them to California’s income tax. Two tests are applied to determine if an individual is a resident. The first test, The Identifiable Purpose Test, was discussed in Part 1 of this article. Now we will highlight the most important factors of the second test, which is known as the Close Connection Test.
Test 2: The Close Connection Test
The Close Connection Test is more often used to determine if a person domiciled in California who has lived outside of the state for much, if not all of the tax year, is still a resident of California.
In general, a person domiciled in California is presumed to still be a resident of California and, so, fully taxed by the state unless he has been living outside of the state for over two years. To avoid California residency classification, an individual must show that they have a closer connection with another state than they do with California.
This is very difficult to do because California generally assumes any time living away from California for less than two years is for a “temporary or transitory purpose;” so, moving away from California won’t stop the state from attempting to fully tax income for at least two years. Additionally, the burden of proof regarding a change of domicile is on the taxpayer.
To establish a new domicile, two things are necessary:
- the taking up of a physical or actual residence in a particular place, AND
- the intent to make it a permanent abode; such intention is to be gathered from one’s acts.
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Therefore, the following actions are recommended in proving that a person is not a California resident. Not all factors have to be met. This is a balancing test:
∙ Sell the California residence
∙ Stay at a hotel or with friends/relatives whenever returning to California
∙ Leave California employment
∙ Close down/sell California business
∙ Discontinue business and social ties in California
∙ Track communications (telephone calls, emails, etc.) with California to prove taxpayer has attempted to resolve any personal business with a California service provider from his new abode outside of California
∙ Use registered/certified mail or express mail services whenever sending documents to California to prove once again that the taxpayer resolved issue arising with a California provider from outside of that state.
∙ Purchase an abode in the new state which is comparable in size to the abode vacated in California
∙ Move the entire family, including pets, to the new abode
∙ Enroll any minor children in schools located in the new state
∙ Terminate services of professionals (doctors, accountants, lawyers, etc.) in California and promptly replace them with other professionals located in the new state
∙ Register to vote and, thereafter, do vote in the new state
∙ Register all vehicles, including boats, in the new state
∙ Obtain driver’s license and other licenses in the new state
∙ Close out bank and other financial accounts in California and, otherwise, open similar accounts in the new state
∙ Transfer all credit cards from California to the new state
∙ If religious, the taxpayer should stop attending religious services in California and begin doing so in the new state. Any donations should, thereafter, be to religious organizations in the new state.
∙ Close out any post office boxes in California and, otherwise, have all mail forwarded to new state
∙ Limit visits to friends, family, vacating in California
∙ If the taxpayer owns investment property in California, they should consider purchasing similar investment property in the new state or, otherwise, divest a portion of their California property portfolio.
∙ Obtain declaration from third parties who can testify to the taxpayer’s sincere intention to permanently move away from California.
If you no longer wish to be domiciled in California, then you must treat that decision as a decision to leave California in your rearview mirror. If you are the subject of a California residency audit, there may be room to negotiate a settlement, however, only after a thorough and effective response to the audit.
