Key Takeaways
- So, what is the California exit tax? The California exit tax explained
- How much is the California exit tax?
- Who has to pay California exit tax?
- Why was the California exit tax of 2020 created?
- The California Wealth Tax Proposal in a Nutshell
California is known for having some of the most significant in-state taxes in the country with a 13.3% annual income tax rate.
However, did you know that you might still be taxed even after you leave the state?
Yep! Thanks to the California exit tax legislation, depending on how much money you get from in-state activities, such as investments in real estate or business operations, you could still be treated like a Californian on your next tax return!
Join us as we walk you through the California wealth and exit tax questions, such as “What is the California exit tax?”, how much it is, who it applies to, and a deeper dive into the California wealth tax proposal and Assembly Bill 2088.
So, what is the California exit tax? The California exit tax explained
The California exit tax is a one-time tax that must be paid by businesses and individuals who relocate outside of California.
The tax is based on the value of the business or individual’s assets, including property, stocks, and other investments.
It forms part of the larger California wealth tax, whereby the state imposes a tax based on its residents’ wealth.
Those who have lived in the state at any point in time in the past and who earn an annual income greater than $30 million are affected by the wealth tax and would have to pay an annual tax on their wealth for as long as 10 years after they have left the state.
How much is the California exit tax?
The amount of the California exit tax is 0.4% of an individual’s net worth over $30,000,000 in a tax year, regardless of where the assets are located—within California, elsewhere in the United States, or overseas.
This threshold is reduced to $15,000,000 if a married taxpayer files a separate return from their spouse.
The one caveat is that there is no California exit tax on real estate (although California real estate may still be taxed under California Revenue and Tax Code § 17591).
Who has to pay California exit tax?
The exit tax applies to both businesses and individuals who leave California.
This includes businesses that move their operations out of state, as well as individuals who relocate to another state. The exit tax only applies if you’re moving to another state—not when relocating within California.
Why was the California exit tax of 2020 created?
The exit tax is intended to recoup some of the money that California has invested in these businesses and individuals.
For example, if a business owner has received tax breaks or other financial incentives from the state, the exit tax ensures they continue contributing to California’s economy even after they leave.
The primary reason for the proposal was to close a loophole that allowed people to avoid paying taxes on their capital gains.
Under federal law, capital gains are only taxed when they are realized. This means if someone buys stock for $1,000 and it increases to $10,000, they don’t owe tax on the $9,000 gain until they sell the stock.
If that person lived in California and moved to another state before selling the stock, they might avoid paying California tax on those gains.
To address this, California proposed the wealth and exit tax, which would require certain individuals leaving the state to pay tax on unrealized capital gains.
The proposal has been criticized by many who argue that it is unfair and punitive. Critics point out that many people leave California because they can no longer afford to live there, and taxing them further may make relocation even more difficult financially.
The California Wealth Tax Proposal in a Nutshell
California is in the midst of a major overhaul of its tax code, which could expand the state’s ability to tax non-residents, even if they sever their connections with the state.
The bill causing considerable debate is Assembly Bill 2088 (AB 2088), commonly referred to as the California wealth tax proposal.
Introduced in Sacramento in August 2020, AB 2088 proposed California’s first wealth tax, affecting individuals who have lived in the state and who earn an annual income greater than $30 million.
Before exploring the proposal’s exceptions and potential consequences, it’s important to understand how California’s tax code may affect you even after becoming a non-resident.
Whether you own California real estate or operate a business connected to the state, understanding these tax implications is essential to minimizing potential tax exposure.
Starting point: Residency & the California exit tax proposal 2020
California’s Franchise Tax Board (FTB) determines California residency and plays a key role in California residency audits.
Factors considered include:
- The location of your primary residence.
- Where your spouse and children live.
- Your children’s school district.
- Your credit card billing address.
- California homeowner exemptions.
- The number of days you spend in California each year.
- The address shown on your federal and California tax returns.
- Where you vote.
- Where your vehicles are registered.
At first glance, simply moving away may seem enough to avoid California residency. While physical presence is an important factor, it is not the only consideration.
This is especially relevant for people who travel frequently or own homes in multiple states.
Even after changing your address, updating your tax returns, and relocating, you may still have California tax obligations depending on your financial ties to the state.
The FTB uses the above factors as guidelines, but they are not the only considerations during a residency audit.
A common misconception is that leaving California automatically ends your California income tax obligations. That is not necessarily true.
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Requirements for the CA exit tax 2020: Do they apply to you?
California considers two major factors when determining whether your income remains taxable under the California exit tax proposal:
- Do you generate income from California sources (such as California real estate or business investments)?
- Does your business continue operating within California (employees, facilities, offices, etc.)?
Let’s examine each of these in more detail.
Income-generating sources from within the state
According to California Revenue and Tax Code § 17591, financial ties to California may continue creating California tax obligations even after you relocate.
For example, if you own or invest in California real estate, you may still owe California tax on that income despite residing in another state.
This also applies when you sell California real estate because it is generally treated as California-source income.
FTB Publication 1031 further explains the different types of California-source income and property interests that may remain taxable after moving.
If you are facing an FTB residency audit, I handle these cases throughout California.
Learn about California residency audit defense →
If you’ve left California—or are planning to—FTB residency audits often begin quietly.
The FTB can audit your residency for years after you leave. A free 15-minute call with Sam covers what the FTB actually reviews when someone moves out of state, your potential exposure based on your specific facts, and what a clean exit audit-defense file looks like.
Talk to Sam About Your California Exit — Free →
Or call: (619) 378-3138
