Pre-Residence Tax Planning for Future California Tax Residents

Although some nonresidents may find it hard to believe, we also have many nonresident clients who want to become California income tax residents (or at least, acknowledge that they will become California income tax residents as a result of plans to reside in California long enough each year to be unable to avoid residence status, if challenged). These situations arise, for example, for residents of other states who are fleeing state-imposed estate, gift or inheritance taxes, like those imposed in Washington, Oregon, Hawaii, Illinois, Massachusetts or New York (California presently imposes no estate, gift or inheritance taxes). For other nonresidents, California tax residence will necessarily result from taking a job in California, starting or acquiring a California business or managing their investments here on a full-time basis.

For all of these soon-to-be California income tax residents (as well as some clients claiming non-residence who know they are vulnerable to a “no-win” residency tax audit, if questioned), we strongly recommend pre-residence tax planning. For our Canadian expat clients and other non-US citizens, pre-residence tax planning is especially important due to potentially extreme differences between California’s tax system and the foreign country tax system to which they were previously subject. Additionally, California does not follow all federal income tax rules and is not bound by US income tax treaty commitments. Accordingly, income that may be exempt from US tax under treaties or federal law may nevertheless be subject to tax under California, such as the income earned in a Canadian Registered Retirement Savings Plan, or “RRSP.”

Some pre-residence tax planning must be implemented prior to arrival, including planning to address the problem posed by arriving with investments having unrealized gains and a low income tax (cost) basis (as determined for California purposes). This is especially important since California will tax the full difference between the depreciated cost basis of the asset and its sale price, no matter where you were when that appreciation occurred) and has no tax rate break for capital gains.

Other “pre-residence” planning, although potentially time-sensitive, can be implemented after arrival, for example, at the time when restricted, share-based compensation is granted to someone beginning work for a California employer. We regularly guide new residents through planning designed to mitigate the tax consequences of these tax law differences and exploit the disharmonies between California tax law and the tax law of other states or countries, where they exist.

At Lance Cross-Border Law and Tax, we have decades of experience assisting future residents of various parts of California with California (and Federal) pre-residence tax planning. We also recommend preparation of at least the outlines of a departure tax plan at the time your pre-residence tax planning is being formulated (see discussion on the page of this website entitled “Tax Planning for Departures from California, including Changes of Domicile and/or Tax Residence”). We welcome inquiries concerning your specific tax situation. Feel free to call us at (760) 578-5093, or contact us via email at Brent@LanceCrossborder.com or by using our online contact form. We will respond to all relevant inquiries without any obligation. Why not put us to work preventing or solving California tax issues or problems for you today?