California is famous for leaving no stone unturned in its quest to collect taxes the state believes it’s owed by former residents, but the Golden State is becoming even more aggressive in pursuing taxpayers that leave the state, accountants say.
“Any move you’re making that involves taxes regarding California, you need to be careful and strategic in making those moves,”
Diane Kennedy, an accountant with
US TaxAid Services in Las Vegas, told me Thursday.
Kennedy, with more than three decades of experience working with the wealthy on their taxes, recently sent an email alert to clients that several states are more enthusiastic about collecting taxes from former residents.
“Over the past month, one of my most frequently asked questions has to do with what it takes to move out of a higher-tax state for a lower-tax state,” Kennedy told clients.
“The most aggressive tax state is California, as far as wanting to make sure you can’t escape their net.”
Kennedy said one factor that California is considering in determining Golden State residency for those with homes here and in another state is: Which one is more valuable? Given California real estate prices,
it's a test that's weighted in California’s favor.
“I advise my clients that if they keep a California home, it increases the risk of examination,” said
Paul Bleeg, a partner with the accounting firm EisnerAmper in San Francisco. “I don’t advise my clients to sell their properties, however,
I do talk about the risk of keeping California residential properties.”
Those risk factors rise if the California home is left vacant or is used by family members rather than turning it into a rental property that is occupied by a tenant who is not related to the owner, he said.
Kennedy’s advice to clients is more clear cut: “Sell your California property and buy a home in your new state.”
Plus, given the difference between California’s sky-high sale prices and relatively lower rental rates,
former residents will likely do better investing that money in real estate in their new home state.
Kennedy has seen clients run into the
cross-hairs of California’s taxing authority when they go to Texas and rent a place, while keeping their California home.
“They’re not quite sure whether Texas is right for them, so they’re going to rent for a while,” Kennedy said. “California has come after them saying,
‘You haven’t made a decision to move to Texas because you’re just renting, whereas you have this more expensive house in California.’”
Former California residents who continue to generate income in the state, such as having a California rental property, must also file a nonresident California tax return. The return includes a questionnaire that asks about the taxpayer’s change of residency, such as how many days are spent in California, and if they continue to own California real estate.
“These questions should be answered fully and truthfully,” Bleeg advised.
Along those same lines, Kennedy said one of her clients learned the hard way the cost and headaches of ignoring a tax notice from the California Franchise Tax Board.
“She didn’t realize California could reach all the way across the country and take money out of her Florida bank account,” Kennedy said.
Kennedy said California
tax collectors are also monitoring social media usage, especially
by celebrities and the wealthy, to ensure that those who say they've left the state aren’t posting frequently from California.
Bleeg said he
saw many of his California clients leave in 2020. Asked whether she is seeing her clients leave California, Kennedy said,
“More than I’ve ever seen before.”
Kennedy said there’s also a change in who is
leaving the Golden State among her clients as more tech employees are moving to Austin and elsewhere as their
companies adopt remote work or move their headquarters out of the Bay Area entirely.
"The people that I see leaving are probably making $350,000-plus a year,” Kennedy said. “I have a number of clients making
over a million a year, and they’re the ones that were the first to leave.”