Wealth Planning

3 Tax Considerations if Leaving California

March 5, 2024

3 Tax Considerations if Leaving California | Aspiriant Wealth Management

California, the Golden State, has long been an attractive place to live but recent data indicates a population decline. High costs of living, including soaring housing prices and hefty taxes, are driving many to move to low-tax or no-tax states. Aspiriant wealth advisors are often asked if there are money-saving opportunities by moving away from California, particularly in tax planning or tax strategy. And our advisors have observed there can be an increase in conversations about tax minimization when a client is anticipating a liquidity event.

Aspiriant’s in-house tax services team urges careful consideration if moving out of California due to taxes. Chris Murray, practice leader in Tax Services and partner said, “Leaving California isn’t just about changing your address; it’s about strategically navigating a complex tax landscape to ensure financial prosperity and peace of mind.”

If you’re thinking about a move from California to reduce taxes, keep in mind these three considerations with significant tax implications:

1. Changing residency

To change your domicile from California, you must both physically relocate to a new residence outside of the state and intend to reside there permanently or indefinitely. In California, residency for tax purposes is determined by two main criteria:

  • Individuals are considered residents if they are present in California for reasons other than temporary or transitory purposes, known as statutory residency. However, there is a safe harbor provision if the total number of days spent in California is less than six months (183 days).
  • Individuals who are domiciled in California but temporarily reside outside of the state for a temporary or transitory purpose may also be considered residents for tax purposes.

This may be the most difficult starting point for people looking to break up with California, as noted in this Financial Adviser article.  “An individual must establish ties to their new state that are at least comparable, and preferably stronger, than the previous ties to California. But that is only half the job. It is also critical that the individual breaks their former ties with California. Individuals leaving California are typically better at doing the former than the latter, and lingering ties to California are the cause of most difficulties at audit (e.g., retaining their California residence).”

Mike Stok, director of Tax Services and partner said he provides a checklist for clients relocating from California. This checklist at the end of the article ensures they establish ties to the new state while severing connections with California.

2. Income considerations

In California, the allocation of regular wages and salaries is typically determined by the number of days worked within the state. However, when it comes to deferred bonuses, it is based on the work performed in California, regardless of your residency at the time of payment. This means that even if you have moved out of state by the time your deferred bonus is paid, it will still be allocated to California if the work leading to that bonus was done there. Additionally, certain types of income, such as deferred bonuses, equity compensation like stock options and restricted stock units (RSUs), as well as severance or termination pay, may have multi-year allocations, further complicating the determination of your tax implications in California.

Other types of income that may still be attributed to California despite your relocation includes earnings from board fees and severance packages. Additionally, several other financial aspects may require evaluation, such as capital loss carryovers, 1031 exchanges, net operating losses and passive activity losses. Each of these factors can impact one’s tax liabilities and needs careful consideration to ensure compliance with California tax regulations.

3. Equity compensation

When it comes to equity compensation and moving from California, taxpayers are advised to exercise particular caution due to the varying tax regulations across states, especially when it comes to tax minimization strategy. While most states tax nonresidents on option income based on when and where it was earned rather than when received, exceptions exist. In California, taxation is evaluated from the grant to exercise date. For Incentive Stock Options (ISOs), future gains will be linked to the taxpayer’s state of residency unless there is a disqualifying disposition. A disqualifying disposition occurs when ISO shares are sold sooner than 2 years after grant and within a year from exercise. For non-qualified stock options (NSOs), the disparity between exercise value and strike price is taxed as ordinary income, with taxation determined by California residency within the grant to exercise date range.

The California Franchise Tax Board offers examples of equity-based compensation scenarios and we recommend reviewing these. However, given the complexities noted above, careful review is essential for taxpayers to ensure compliance with relevant tax laws. Asking a tax professional well-versed in these scenarios can prevent potential financial losses.

Navigating other high tax states

However, the issue of high taxes is not unique to California. States such as New York, New Jersey and Connecticut also carry a reputation for high taxation, which can similarly influence residency decisions. These states, like California, offer unique cultural, economic and social opportunities that can offset the tax burdens to some extent. Nevertheless, Aspiriant advisors are equipped to help clients navigate these complex choices, ensuring they understand the broader tax implications and lifestyle changes involved in relocating from any high-tax state. Our approach involves a thorough examination of not just the financial but also the personal factors that define a successful residency transition.

Reducing tax payments vs. lifestyle changes

“If you’re contemplating a move from California or other high tax states for tax minimization,” shared Mike Fitzhugh, director in Wealth Management and partner, “we ask our client’s one crucial question: Are you looking to relocate to a place like Florida or Texas because it’s where you genuinely want to live, or is the primary motivation to reduce tax payments?”

If tax reduction is the goal, Mike asks clients to weigh the financial savings against their current lifestyle. Lifestyle factors to consider may include how weather or traffic could impact daily routines, access to healthcare, public resources such as libraries or community centers and perhaps the importance of quick access to an airport. Not to mention the opportunity to establish a new social circle.

“Some individuals are initially drawn to the tax benefits and initiate the relocation process, while others reassess once they grasp the requirements for changing residency,” Mike explained. “Clients sometimes discover that the advantages of moving aren’t as compelling when they realize the procedures for updating their residency. And occasionally, we encounter clients who decide to return to California after moving to a low-tax or no-tax state.”

To relocate from California or not?

If you want to relocate from California to save on taxes, keep in mind it involves careful consideration of various tax implications and lifestyle factors. While reducing California tax payments may be a primary motivation, it’s essential to weigh the financial savings against personal preferences and quality of life considerations. Whether you’re looking to establish residency in a low-tax state or reassessing your options, seeking professional tax advice and thoroughly understanding the rules for changing residency is crucial for a smooth transition. Ultimately, the decision to relocate should align with your long-term financial and personal goals.

Christopher Murray
Christopher Murray

Practice Leader in Tax Services, Partner

Chris joined Aspiriant in 2022 after more than 30 years in private practice and now leads our Tax Services Group. He has extensive experience working with high net worth individuals as well as with closely held businesses. With a practice based in the San Francisco Bay Area, Chris has been helping clients to manage their equity compensation from the early days of the internet!

Prior to merging with Aspiriant, Murray, Stok & Company (the San Francisco firm that Chris founded in 1991) was a boutique tax and advisory practice with a varied portfolio of loyal and satisfied clients from all across the country.

Chris received a B.S. in Economics from the University of California at Berkeley (Go Bears!) He currently sits on the leadership team of the San Francisco chapter of the California Society of CPAs and is also a member and past chairman of the State Management of Accounting Practice Committee.

Chris has served on a variety of youth nonprofit boards over the past 30 years and appreciates the opportunity to leverage his expertise for the benefit of his community. You can often find him carrying his camera as he pursues his passion for architectural photography or poring over cookbooks as he searches for exciting new dishes to prepare. Chris and his wife, Kris, raised their family in the San Francisco Bay Area but escape to the North Shore of Lake Tahoe at every opportunity.

Mike Fitzhugh
Mike Fitzhugh

Director in Wealth Management, Partner

Mike has been delivering comprehensive planning services to high net-worth families since 1983. He served on the Aspiriant Board of Directors, including serving as Chairman from 2007 until 2010.

Mike began his professional career at Deloitte Haskins & Sells in 1982, and joined the Executive Financial Counseling Group, led by Tim Kochis, three years later. For the next five years, he provided comprehensive financial, tax, and investment services to senior corporate executives and other high net-worth families.

After earning an MBA, Mike led the financial planning practice at an investment management consulting firm in Silicon Valley for four years, developing an expertise in the strategic role of stock options in wealth planning. In 1996, he joined Kochis Fitz, the predecessor firm to Aspiriant, and became a Principal of the firm in 1998. During that time, he developed a specialty in designing
Rule 10(b)5-1 stock sales plans.

In 2008, Barron’s recognized Mike as one of the 100 top independent wealth managers in America. He has been ranked by the San Francisco Business Times among the top 25 independent Wealth Managers in the Bay Area since that list was developed in 2007. Mike co-authored the book, Wealth Management, A Concise Guide to Financial Planning and Investment Management for Wealthy Clients. As an expert in comprehensive wealth management, he has appeared on National Public Radio’s Marketplace and been quoted in the New York Times, San Francisco Chronicle, San Jose Mercury News, Financial Times, and Research.

Mike has been an instructor in the Personal Financial Planning Program at University of California-Berkeley, and makes presentations at professional conferences for financial advisors, attorneys, and CPAs.

Mike graduated from the University of Arizona with a BS degree in Economics and Finance (with Highest Honors). He earned a MBA from the Haas School of Business at the University of California-Berkeley.

Mike Stok
Mike Stok

Director of Tax Services, Partner

Mike joined Aspiriant in 2022 via a merger with Murray, Stok & Company and serves as a Director of Tax Services. He has over 25 years of experience within the financial services industry, providing high net-worth individuals and closely held businesses with tax and consulting services.

Prior to joining Aspiriant, Mike was a partner at Murray, Stok & Company, a boutique tax and accounting services firm located in San Francisco. Mike started his career in the Tax department at Arthur Andersen & Co., also in San Francisco.

Mike earned a B.A. degree in Business Economics, with Accounting Emphasis, from the University of California, Santa Barbara. Mike sits on the board of directors of the Alexander Valley Film Society, an arts and education-focused non-profit based in northern Sonoma County.

Mike and his wife, Debra, reside in Oakland and enjoy getting away to their wine country retreat in Cloverdale, Calif., as often as possible.

Editor’s note: This article has been updated since its original March 5, 2024, publication.

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