California exit tax: What you need to know before moving out

Are you considering leaving the Golden State? Before you pack your bags, understanding California's complex tax implications is crucial for a smooth transition. The proposed California exit tax has generated significant discussion among high-net-worth individuals and long-term residents planning their departure.

In this comprehensive guide, we'll explore everything you need to know about this important tax consideration, from its basic structure to strategic planning opportunities for those contemplating a move from California.

What is the California exit tax?

The “California exit tax” is a misnomer for a proposed wealth tax, not yet enacted as of February 2025, that would affect high-net-worth individuals leaving the state. Key points of the proposal include:

• It would target individuals with a net worth exceeding $30 million ($15 million for married taxpayers filing separately).
• The proposed tax rate is 0.4% on net worth above these thresholds.
• If enacted, it could apply for up to 10 years after leaving the state.
• The tax would encompass various assets, including stocks and investments, while California real estate would be taxed separately.
• It aims to close loopholes in capital gains tax regulations.

This proposed tax may also apply to individuals leaving California for international destinations, not just for other US states.

This proposal aims to recoup revenue and prevent capital gains tax avoidance. The federal expatriation tax, detailed on the IRS expatriation page, is a separate consideration that applies to individuals renouncing US citizenship or long-term permanent residency.

Who is subject to the California exit tax?

While California doesn't have an official "exit tax," the term refers to ongoing tax obligations for those leaving the state with significant financial ties. This primarily affects high-net-worth individuals and long-term residents.

Key criteria for potential tax liability include:

• net worth exceeding $30 million for individuals or $15 million for married individuals filing separately
• significant California-sourced income, including business operations, real estate, or investments
• long-term residency status (typically nine out of the last 10 years)

It's crucial to note that even after leaving, you may still owe California taxes on:

• capital gains from California property sales
• income from California-based sources
• business revenues generated within the state

To minimize potential tax obligations, consider selling California property before departure, severing business ties within the state, updating your legal documents and residency status, and consulting with a tax professional for personalized strategies

How much is the California exit tax?

The amount of the proposed California exit tax varies significantly based on your specific financial situation. 

The tax assessment considers your worldwide net worth on the departure date, the fair market value of California-based assets, your historical California-source income, the duration of your California residency, and your ongoing ties to the state.

For high-net-worth individuals, the proposed tax rates could result in significant obligations:

• 0.4% annual tax on worldwide net worth above $30 million
• additional state income tax rates of up to 13.3% on California-sourced income
• potential capital gains taxes on appreciated assets
• special considerations for business owners and real estate investors

The actual tax impact can vary dramatically based on your specific circumstances and how you structure your departure from the state.

Strategies to minimize tax liability when leaving California

If you’re looking to minimize your tax liability when leaving California, it requires careful planning and execution. Implementing these tactics can help reduce your California exit tax burden:

Asset management strategies:

1. Transfer investments and financial accounts to your new state of residence before changing domicile.
2. Consider establishing trusts in more tax-friendly states.
3. Evaluate the timing of asset sales to optimize tax implications.
4. Structure business interests to minimize California-source income.

Timeline planning:

• Begin preparations 12-18 months before your planned departure.
• Document your intent to establish domicile in another state.
• Maintain detailed records of your time spent outside of California.
• Plan major financial transactions around your departure date.

Pro tip: Work with experienced tax professionals who understand both California tax law and multi-state taxation issues.

Documentation requirements:

• register to vote in your new state
• obtain a new driver's license
• update estate planning documents
• change vehicle registrations
• establish social and community ties in your new location
• keep detailed records of your presence outside of California

These strategic moves can significantly impact your tax liability when leaving the state.

What if you’re renouncing US citizenship or green card?

If you're planning to expatriate and renounce your US citizenship or surrendering your long-term green card, you may be subject to both federal and California-level tax scrutiny.

Key points to consider:

1. The federal expatriation tax (IRC §877A) may apply if your net worth exceeds $2 million, your average annual tax liability over the past five years exceeds a certain threshold, or if you fail a certification test.
2. If you are a California resident at the time of expatriation, your California-source income and capital gains may still be taxed.

If the proposed California exit tax becomes law, California could continue to assess taxes on your wealth even after you renounce your US status, for up to 10 years if you meet the asset threshold and prior residency test.

Before expatriating, consult with a tax expert. The sequence and timing of your moves, both geographically and legally, can drastically affect your tax exposure.

The pros and cons of the California exit tax

Understanding both sides of the California exit tax debate is key for making an informed decision.

Pros:

• It helps maintain state revenue for essential services.
• It prevents sudden budget shortfalls from wealthy residents departing.
• It ensures long-term residents contribute to the infrastructure they've benefited from.
• It creates a more predictable tax base for state planning.
• It reduces immediate tax burden spikes on remaining residents.

Cons:

• It may discourage high-net-worth individuals from staying in or moving to California.
• It could lead to a "brain drain" as high-income earners leave the state, impacting business investment.
• It adds complexity to state tax regulations.
• It may potentially violate the constitutional right to travel.
• It may be challenging to enforce across state lines.

A balanced understanding of these factors can help you weigh up your decision when considering a move away from the Sunshine State of California.

Leaving California? Make sure you're tax-compliant with our help!

Don't navigate California's complex tax landscape alone. Our team at Taxes for Expats specializes in helping individuals like you manage their tax obligations when leaving the state. 

We offer comprehensive services including:

• personalized exit tax planning strategies
• asset restructuring advice
• residency transition planning
• documentation and compliance support
• ongoing tax support in your new location

Our experienced professionals will:

• analyze your specific situation
• develop a customized exit strategy
• ensure compliance with all regulations
• minimize your tax exposure
• provide ongoing support after your move