At a Glance
Understanding your residency status is crucial when it comes to taxation, especially in California, a state known for its complex tax laws. Determining whether you are a resident or a nonresident for tax purposes can significantly impact your state tax liability.
Explore the difference between residency and domicile and how to classify a California resident vs. nonresident.
The Difference Between Residency and Domicile in California
A person’s residence and domicile can refer to the same location, but these terms are not synonymous. In California, you are considered a resident if you meet one of the following criteria:
- You are in California for other than a temporary or transitory purpose.
- You are domiciled in California, meaning California is your permanent home, but you are temporarily located elsewhere.
Residency refers to where you currently live, while domicile refers to the place you intend to return to after a temporary absence. Generally, you are considered a resident of the state where you have the closest connections. A taxpayer can have multiple residences at any given time but can only have one domicile. Intent is a key factor when making this determination.
Guidelines for Determining Residency
All individuals not considered residents of California are considered nonresidents. Nonresidents are only taxed on their income from California sources, while residents are taxed on income from all sources. The California Franchise Tax Board (FTB) may scrutinize various factors in making a residency determination, such as:
- Amount of time you spend inside California vs. outside California
- Location of your spouse/registered domestic partner (RDP) and children
- Location of your principal residence
- State that issued your driver’s license
- State where your vehicles are registered
- State where you maintain your professional licenses
- State where you are registered to vote
- Location of the banks where you maintain accounts
- The origination points of your financial transactions
- Location of your medical professionals and other healthcare providers, accountants, and attorneys
- Location of your social ties, such as your place of worship, professional associations, or social and country clubs you are a member
- Location of your real property and investments
- Permanence of your work assignments in California
It is important to note that the burden of proof for establishing non-residency is on the taxpayer. For more detailed information and guidance on California residency, refer to FTB Pub. 1100 and FTB Pub. 1030.
SALT Deduction Significance
The SALT deduction allows individuals to deduct the state and local taxes they paid on their federal income tax return. The Tax Cuts and Jobs Act (TCJA) introduced a $10,000 SALT deduction cap for federal income tax purposes when there previously was none. Since California is a high-tax state and residents are taxed on their income from all sources, California residents are frequently limited in their ability to fully deduct their state and local taxes.
Strategies to Mitigate the SALT Cap Impact
Given the SALT cap, individuals can explore various strategies to reduce their tax burden in California:
Review Your Tax Residency Status: Evaluate your residency status and consider whether there are legitimate ways to change your domicile or reduce the number of days you spend in California.
State Credits: California allows credits for residents who paid taxes to other states to help offset the cost of taxing residents on their income from all sources. These credits are not available for nonresidents unless a reciprocity agreement is in effect.
Workarounds: Tax professionals and experts can advise you on potential workarounds that may help you legally optimize your tax situation while remaining compliant with federal and state tax laws.
Consult the Experts
It is essential to consult tax advisors who specialize in state and local tax to provide expert guidance in this area. The distinction between residency and domicile plays a significant role in determining your state and local tax obligations. Remember that the burden of proof for establishing non-residency is on the taxpayer, so gathering the necessary evidence to support your claim is critical.