Californians will tell you they pay too much in taxes now, and that statement remains completely accurate. However, the state legislature has AB 1253 moving through the legislative process at this time. If this bill passes, Californians will see higher taxes immediately. In fact, the state wants to tax individuals retroactively for income made dating back to January 1, 2020. This means they will bill Californians who meet a certain income threshold an additional tax.
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For those making more than $1,181,484, the state would impose an additional one percent tax on their income. Men and women making more than $2,363,968 would be subject to a three percent increase in state income tax, while those making more than $5,907,420 would pay 3.5 percent more in state tax. According to the blog from Brotman Law, the state legislature determined these amounts by taking $1M, $2M, and $5M and adding inflation adjustments.
Lawmakers explain this tax would only affect high-income residents of the state, with the highest tax rate being 16.8 percent. Individuals who wish to know more about the bill making its way through the legislature should visit the site itself to read the full text. Critics of the bill warn this could lead to a mass exodus from the state, but the legislature continues to push the measure forward. At this time, the current top tax rate in the state is 13.3 percent, and this rate has been in effect since 2012. The state taxes ordinary income and capital gains at this same rate.
Federal Tax Code Changes
In 2018, the federal tax code changed, and this hurt many Californians. Now those paying 13.3 percent of their income to non-deductible state taxes after the $10,000 cap find their back pocket is much lighter. The federal tax code applies to all Americans, and California wants to put something similar in place.
Taxing Individuals in Other States
People often suggest men and women who don’t wish to pay these high taxes should simply move to another state. However, legislators in California continue to look for ways to tax individuals who don’t live in the state. In fact, the state wants to assess taxes on individuals who choose to move. Assembly Bill 2088 would impose a state wealth tax on individuals while also requiring those who move out of the state to continue paying California state taxes for up to ten years after their departure. While experts feel the courts would strike this tax down, there is no guarantee this is the case. Anyone who has ever dealt with California’s state tax agency knows how aggressive the agency can be.
For example, the state has the Franchise Tax Board, which monitors the distinction between residents of the state and those who they classify as residents of another state. They pursue this line rigorously and will probably do the same with the new taxes. This means a person who departs the state will find California is probing how and when they did so.
Who is Considered a Resident?
At this time, the state considers anyone who is in the state for another other than a transitory purpose or a temporary one falls under the resident classification. In addition, anyone who lives in California but has left the state for a transitory or temporary purpose would fall into the resident category. The individual bears the responsibility of proving they are not a resident of California.
The state presumes anyone who has been in California for nine months to be a resident. In contrast, a person must live outside of the state for a minimum of 18 months before California no longer considers them a resident. The state laws definitely favor California as an entity over the individuals that live there. For instance, a person may maintain a home in the state for various purposes. However, a person only has one domicile, although they may own multiple homes. How does the state determine a person’s domicile?
When determining a person’s domicile, authorities look at several things. A person’s intent plays a role, but this determination needs to be made objectively. First, look at the location of the primary residence. Ignore any additional homes at this time. Look at where the spouse and children live and where the children attend school. They do so in their primary residence.
Days spent in a state and outside of that state factor into the determination, as do bank accounts and membership in various organizations. A person’s home church provides information about their domicile, as do matters related to their vehicles. States look at an individual’s driver’s license, their vehicle registration, where they are registered to vote, and more. Employment helps determine a person’s domicile, and this information becomes of great help when a person travels extensively as part of their work duties.
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Business owners often have locations of their organization in different states. What is their domicile in this situation? One way to make this determination is to look at the time devoted to each location. The place where the owner spends most of their time working in the business will typically be their domicile, although the factors mentioned above must come into the process. A person needs to know where they are to pay taxes or they could end up with a huge tax bill along with interest and penalties tacked on.
Nobody wants to learn they are being audited for any reason. The IRS retains the right to audit a taxpayer for a period of three or six years. In contrast, California doesn’t set a limit on audits, which frightens those who live in the state. For instance, a person who never files an income tax return could find California audits them forever. A person might state they no longer reside in the state and therefore don’t have to pay state taxes. If the state doesn’t agree, the individual may then need to file a non-resident tax return to report any California income. If there is any confusion, seek help from tax experts. This is one area where a mistake can have devastating consequences, so it’s best to get the facts and ensure you remain on the right side of the law.