ROBERT L. SOMMERS
Note: This exercise is for educational purposes only and is not intended to be legal or tax advice. Your particular facts and circumstances must be considered when applying the U.S. tax law. You should always consult with a competent tax professional with respect to your particular situation.
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The state of California taxes its "residents" and those receiving "California-based source income"; therefore, a non-resident receiving non-California-based income has no income tax obligation.
Definition of residency:
Becoming a non-resident for California tax purposes is easier said than done. California defines a resident as anyone: (1) in the state for other than a transitory or temporary purpose; or (2) whose "domicile" (the permanent home to which a taxpayer intends to return) is in California but who is outside the state for a transitory or temporary purpose. California presumes a resident spends more than 9 months a year in the state; however, spending less time does not create a presumption of non-residency. Also, one may be a resident of California even though his domicile is elsewhere.
California takes an extremely aggressive approach in classifying taxpayers as residents. For instance, a taxpayer who worked for 4 years outside of California was still considered a resident, because his wife and children remained in the state during that time. The law has since been modified to permit a resident working outside the state for at least 18 consecutive months to be generally considered a non-resident. Annual visits to California for not more than 45 days are permitted under this exception.
If you are domiciled outside California, visit the state for less than 6 months and do not work or engage in business during your stay, your presence is considered temporary or transitory. Therefore, to avoid California taxes, change your domicile to another state or country, and then enter the state on a temporary or transitory basis.
Determining California source income:
As a non-resident, you will be taxed on your California-source income: fees, wages, salaries, business income, rents or other income from real estate or other tangible personal property (vehicles, machinery, equipment) in the state.
A non-resident partner of a partnership has California-source income to the extent that the partnership receives income from California sources. The same is true for beneficiaries of a trust or an estate, shareholders of an "S" corporation (a corporation in which the shareholders, rather than the corporation, are taxed) and a limited liability company (usually taxed as a partnership).
To illustrate: a Nevada general partnership, with two 50% general partners living in Texas, owns a California apartment which generates $100,000 of net income. Each partner receives $50,000 of taxable California-source income from the partnership, even though the partnership is located in Nevada with partners from Texas, because the income is from a California apartment.
Intangible property (patents, copyrights, licenses and royalties) are generally sourced at the owner's domicile and are usually non-taxable. For instance, patent royalties received by a non-resident from a California corporation are non-taxable, even though the contract began when the taxpayer was a resident in the state. Alimony income, interest from bank accounts and interest from promissory notes are intangible assets and not taxable to a non-resident recipient. Likewise, a non-resident investor's purchase or sale of stock and bonds (considered intangible assets) through a California broker is not taxable.
Also, under a new federal law, California can no longer tax retirement payments received by non-residents who worked here when those benefits were earned.
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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**