Is this a successful way to dodge taxes? If so, that loophole should be fixed. I left California 4 years ago and yet somehow still pay taxes to the state.
If you're saying that anyone who was professionally successful in California has no right to ever leave the state, that seems like a tough sell.
I left California for Nevada many years ago, and I subsequently sold stock I accumulated while in California without paying state income tax.
It is legal and you can do it, but there are a lot of legal hurdles. They're pretty well documented around page 5 of FTB 1031 [1].
In my case, I quit my W2 job in California, entered into a contract to lease a home in NV, got rid of all leased or owned real estate in CA, sold or re-titled all motor vehicles from CA, registered to vote in NV, surrendered my CA driver license for a new NV license, re-titled all my financial accounts at my new address, got a NV phone number, etc.
This was all easy because I was single without children. If my situation was more complicated, like I had a spouse or ex-spouse with children enrolled in CA schools, or decided to retain owned real estate in CA, the situation can quickly fall into a gray zone.
If you have a W2 job in CA while claiming you're in NV, it's very hard to escape the CA FTB.
CA is very aggressive about chasing down its former residents. It's important to check all the boxes to get them from chasing you.
After I left, I filed non-resident CA returns for three years basically saying, "I had income but I am not a resident and it was not from a CA source, therefore I owe no CA tax." This is important because it starts the statute of limitations running. If you don't file, the statute of limitations doesn't start.
And while I'm writing all this: what in the world is up with a 13.3% state tax bracket? Screw California.
Those high brackets really only apply to people that are making a lot of money. I make $100k right now and my state tax in California would be nearly the same as it is in Ohio at that rate. That being said, with my work being remote indefinitely I’m going to Texas to save over $400 a month in tax (and cost of living is about the same — very low).
I guess your case was extra special. I remained employed by the same company after moving from CA to AZ and the FTB never bothered me. The year I relocated, I filed my.. 540? after determining what income I earned while living in CA. And that was that. No issues with my options or RSUs either. Being married and having a child was also a non-issue.
If you're married or have children AND they come with you to AZ, that's obviously no problem. In that case, it works in your favor: it's just more data that you're a bona fide AZ resident. I was pointing out that if your children stay in CA while you go to NV, it works against you.
And AZ isn't NV. The FTB pays special attention to NV in particular because it has no income tax. Someone who moves to AZ isn't so obviously trying to skirt CA state income tax.
My case was a little special because I sold a lot of stock right after leaving CA, which makes it a little suspicious to the FTB.
If you have RSUs that were in while you were working in California or a resident of California, the Franchise Tax Board claims a portion of the income as California source when (if) they finally vest. That could be years later, when you're no longer a resident.
If you move from California to another country, and are subject to US Federal Income tax, and don't qualify for an exemption, the Franchise Tax Board still considers you a resident of the state, and as such, taxes you on your worldwide income; as you did not end your residency by establishing residency in another state.
In this case, one also assumes that Musk will continue to spend a fair bit of time in the state. Low-profile people can usually get off with just paying taxes in their home state even though they spend a lot of their time at company offices, conferences, etc. elsewhere. But presumably there is some threshold beyond which you're supposed to be filing taxes in other locales.
New York city has its own income tax rate of 3.9% for high earners. This can be quite a bit of money for hedge fund managers/owners. I've read that some of them live outside NYC to avoid the tax but need to hire a full time person to document and make sure they are not counted as a NYC resident by the city. You can only spend so many nights in NYC and not be counted as a resident, show proof of you being somewhere else, etc.
Income taxes has so many bad consequences. It would be great to ban it and replace it with land value taxes.
The letter of the law in a lot of places can be even worse than that. [1] There's been federal legislation proposed but AFAIK, nothing has been passed. A lot of states theoretically require you to file a tax return even if you only travel there for a day. Of course, I'd be shocked if pretty much anyone complied with that for sometimes travel. But it means lots of people are basically committing tax fraud; many/most probably don't even know they are.
I did on internship in Texas when living in California. I had to pay California state income tax on what I earned there. Luckily Texas has no state income tax or I would have been paying in both states.
> If you move from California to another country, and are subject to US Federal Income tax, and don't qualify for an exemption, the Franchise Tax Board still considers you a resident of the state, and as such, taxes you on your worldwide income; as you did not end your residency by establishing residency in another state.
While this is strictly correct, I think the implications of what you wrote are too strong. If you move from California to another country or U.S. state, the requirements to get an "exemption" from California tax residency are essentially "convince the FTB that you have weaker ties to California than to your new location."
While arbitrary and open to abuse in theory, it appears less so in practice. Quoting from California's Guidelines For Determining [Tax] Resident Status [1], heading "Leaving California" on page 6:
> Example 4 - You and your spouse/RDP are California
residents. You accept a contract to work in South America
for 16 months. You lease an apartment near the job site.
Your contract states that your employer will arrange your
return back to California when your contract expires. Your
spouse/RDP and your children will remain in California
residing in the home you own.
> Determination: You maintain strong ties with California
because your spouse/RDP and children remain in your
California home during your absence. Your intent is to
return to California, and your absence is temporary and
transitory. You remain a California resident during your
absence. You are taxed on income from all sources,
including income earned in South America.
> Example 5 - You receive and accept a permanent job
offer in Spain. You and your spouse/RDP sell your home
in California, pack all of your possessions and move to
Spain on May 5, 2019, with your children. You lease an
apartment and enroll your children in school in Spain. You
obtain a driver’s license from Spain and make numerous
social connections in your new home. You have no
intention of returning to California.
> Determination: You are a part-year resident. Through
May 4, 2019, you were a California resident. On
May 5, 2019, you became a nonresident. All your income
while you were a resident is taxable by California. While
you are a nonresident, only income from California
sources is taxable by California.
> Example 6 - You are a resident of California. You accept
a 15-month assignment in Saudi Arabia. You put your
personal belongings, including your automobile, in
storage in California. You have a California driver’s license
and are registered to vote in California. You maintain
bank accounts in California. In Saudi Arabia, you stay
in a compound provided for you by your employer, and
the only ties you establish there are connected to your
employment. Upon completion of your assignment, you
will return to California.
> Determination: You have maintained greater connections
with California than you have established in Saudi
Arabia. Your absence is for a temporary or transitory
purpose. Therefore, you remain a California resident.
As a California resident, your income from all sources
is taxable by California, including the income that you
earned from your assignment in Saudi Arabia.
Example 5 above is closest to what I think you were talking about by "moving from California to another country." The only way I think FTB could go after you for here is to argue that you could have an "intention" of returning to California eventually, and I do not know whether keeping your American bank accounts at California banks would be enough of a hook for FTB to decide it's worth the effort to try that argument.
For myself, if I did move from California to become an indefinite expat, I wouldn't worry too much about the FTB going after me. Opinions may vary, of course.
Thanks! I hadn't seen the FTB guidance for example 5. I think the tricky bit comes when you plan to live in another country for an indefinite period of at least several years, but not forever (and without any specific return state in mind), and keep a storage unit (in California) with some stuff that you want to keep, but don't want to move to another country because of the expense.
FTB can use 'has a storage unit in California' as a factor; and maybe combined with California banks and California voting, and maybe a California mailing address, if you use friends/family to forward your mail, could be enough to tip the scales for them. It's rather opaque.
I don't think it's a small motivation of Musk to escape the tax rate when he starts to sell his shares. Just because he vested them while in CA - if he's a resident of Texas when he sells I don't think he owes CA a dime.
I wasn't responding specifically to Musk's tax burden, but the question of why would someone who moved out of the state still be paying taxes to the state several years later.
It depends on what type of shares/options/equity grants, and what's still vesting, and what isn't.
ISOs that are exercised in a qualifying disposition are taxed based on residency on the day of exercise.
RSUs that vest while you're a resident are taxed on vest day, and any capital gains from that are taxed based on residency on the day of the sale, yes.
RSUs that vest while you're not a resident are taxed on vest day, and a portion of the income will be california source if you worked in California during a portion of the vesting period, or if you were a residing during a portion of the vesting period.
I recognize this is just my personal experience, but this doesn't hold true for me in the slightest. I grew up and lived in CA for over two decades, but now located in a state with no income tax and employed by a company in the bay area. I pay zero state income tax, as do all my coworkers in the area.
Which is often just not that necessary... must people's income levels in retirement are low enough that CA's income taxes are competitive with many other lower-tax states (not those with no income tax, though, of course).
I don't know the specifics, but I believe the parent comment is alluding to business specific taxes, not the capital gains tax you probably pay as a no-longer-california-resident.
I think rather that people/gov gave a bunch of benefits to be in state that cost the state, but they didn't require that he stay in the state. So i think the implication is that he took resources from the state but didn't stay long enough for the gov/people to see an ROI.
But, as much as i am a lefty(+capitalist), that seems a fault of the state. States should expect this more imo. You give near negative returns to companies to come to your state and then you're shocked when they leave and you haven't gotten your ROI?
But maybe this will be good. If the migration continues perhaps California will have to stop subsidizing low-tax states and let them fend for themselves more.
If you're saying that anyone who was professionally successful in California has no right to ever leave the state, that seems like a tough sell.