If You Are Well-To-Do, California Wants Your Money
The State of California seeks to classify individuals as residents of California in order to subject them to California’s income tax. Two tests are applied to determine if an individual is a resident. The first test (The Identifiable Purpose Test) was discussed in Part 1 of this article. Now in Part 2 of this article we will highlight the most important factors of the second test which is known as the Close Connection Test.
Test 2: The Close Connection Test
The Close Connection Test is more often used to determine if a person domiciled in California who has lived outside of the state for much, if not all of the tax year, is still a resident of California.
For a California-domiciled person living elsewhere, evaluate the purpose and duration of the absence and connections to both locations. There is no universal two-year departure requirement. The employment-related safe harbor has separate statutory conditions and exceptions.
For a California-domiciled person living elsewhere, evaluate the purpose and duration of the absence and connections to both locations. There is no universal two-year departure requirement. The employment-related safe harbor has separate statutory conditions and exceptions.
To establish a new domicile, two things are necessary:
(1) the taking up of a physical or actual residence in a particular place, and
(2) the intent to make it a permanent abode; such intention is to be gathered from one’s acts.
The following subjects may supply evidence of connections to each location. They are not mandatory acts or a checklist that guarantees nonresidency. Review the actual facts before changing a home, business, professional relationship, or other personal arrangements.
Consider the actual facts concerning Sell the California residence. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Stay at a hotel or with friends/relatives whenever returning to California. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Leave California employment. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Close down/sell of California business. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Discontinue business and social ties in California. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Track communications (telephone calls, emails, etc.) with California to prove taxpayer has attempted to resolve any personal business with a California service provider from his new abode outside of California. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Use registered/certified mail or express mail services whenever sending documents to California to prove once again that the taxpayer resolved issue arising with a California provider from outside of that state. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Purchase an abode in the new state which is comparable in size to the abode vacated in California. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Move the entire family, including pets, to the new abode. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Enroll any minor children in schools located in the new state. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Terminate services of professionals (doctors, accountants, lawyers, etc.) in California and promptly replace them with other professionals located in the new state. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Register to vote and, thereafter, do vote in the new state. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Register all vehicles, including boats, in the new state. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Obtain driver’s license and other licenses in the new state. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Close out bank and other financial accounts in California and, otherwise, open similar accounts in the new state. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Transfer all credit cards from California to the new state. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning If religious, the taxpayer should stop attending religious services in California and begin doing so in the new state. Any donations should, thereafter, be to religious organiza-tions in the new state. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Close out any post office boxes in California and, otherwise, have all mail forwarded to new state. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Limit visits to friends, family, vacating in California. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning If the taxpayer owns investment property in California, she should consider purchasing similar investment property in the new state or, otherwise, divest a portion of her California property portfolio. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
Consider the actual facts concerning Obtain declaration from third parties who can testify to the taxpayer’s sincere intention to permanently move away from California. This is a possible subject for factual review, not a required action or a guarantee of nonresidency.
A change of domicile involves actual residence and intent; residency is a separate fact-specific inquiry. Evaluate the complete record rather than treating departure or cutting particular ties as an automatic solution.
Related guidance: Samuel Landis, Esq..
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Sam Landis is a Beverly Hills IRS tax attorney specializing in IRS collection defense, audit representation, and international tax compliance for foreign nationals and US expats.