We are often asked “Are there strategies to reduce California tax on large taxable events such as selling shares of stock or settling a lawsuit?” The central answer to this question may come down to residency at the time of the transaction. The nominal tax rate in California is one of the highest in the nation at more than 13% and California is notoriously aggressive when pursuing present and former residents in tax matters. The recent case involving an inventor of chips who finally defeated California in court after a more than 20 year battle. At stake: almost $55 Million in taxes, based upon an initial assessment of $13.3 million. California alleged the inventor moved to Nevada in advance of registering what was to become a very lucrative patent. The State of California alleged the inventor lied about his actual residency status and disputed taxation on his resulting earnings.
The IRS recently reported more than 250,000 Californians moved away from California in 2013 and 2014, often to States with lower or no income taxes. This strategy will probably not help you in the taxation of proceeds from the sale of California real estate, but it might impact the strategy surrounding an approaching IPO, stock sales or the settlement of a lawsuit. Establishing residency in another state to avoid California’s high tax rate is quite complicated, and you can expect California’s tax agencies to put up a fight.
Is it worth it? You will need to do more than obtain a primary residence out of state. California tax agencies will review every aspect of your life from the nature and “nexus” (source) of your business income to other supporting data such as information from voter registration and your driver’s license. Avoiding an incredibly high California tax bill may include strategy surrounding the location of your spouse and immediate family as well as bank accounts and other personal lifestyle issues.
Allen Barron’s integrated tax, legal and accounting professionals can help to develop strategies to reduce California tax on large taxable events but the impact on your professional and personal life may be substantial. If you are anticipating a large settlement in a lawsuit, retirement and cashing in a substantial amount of stock or options, or an upcoming business transaction such as an initial public offering the professionals at Allen Barron can provide valuable integrated advice tailored for your unique situation. We invite you to contact us or call 866-631-3470 for a free consultation. We help to prepare all associated tax returns and documentation, and represent all taxpayers before California’s tax agencies in a business or personal audit.