(New) California Exit Tax Plan to Penalize the High-Net Worth

What is California’s New Exit & Wealth Tax Proposal 2021

California Exit Tax Plan to Penalize the High-Net Worth

(New) California Exit Tax Plan to Penalize the High-Net Worth: The idea of a California State Exit Tax is to mimic the IRS Federal Exit on US Persons who have significant wealth — and move out of California. The concept is that if a person “accumulated” value during their residence in California, then when they relocate out-of-state, California does not benefit tax-wise from the accumulated but unrecognized growth. Similarly, when a US Person expatriates from the United States, they may become subject to an exit tax based on certain unrealized gains and other types of income. — and while that too is unfair, there is more substance behind the concept of a Federal exit tax than a state exit tax. With a California Exit Tax (and based on broad the proposed statute is written), it is essentially penalizing the Taxpayer for moving out of California — sort of like paying spousal support to the state of California. With California seeking to raise the taxes on high-income earners even higher — wealthy Taxpayers who reside in California may opt to relocate out of California to a neighboring lower (or no) tax jurisdiction such as Arizona or Nevada. Let’s review the basics of California (New) Exit Tax Plan to Tax High-Net Worth:

California Tax Hike Proposal on the Wealthy 

• • • For each taxable year beginning on or after January 1, 2021, in addition to any other taxes imposed by this part or the California Constitution, an additional tax shall be imposed as follows:

      • At the rate of 1 percent on that portion of a taxpayer’s taxable income over the adjusted one-million-dollar ($1,000,000) amount, but not over the adjusted two-million-dollar ($2,000,000) amount.

      • At the rate of 3 percent on that portion of a taxpayer’s taxable income over the adjusted two-million-dollar ($2,000,000) amount, but not over the adjusted five-million-dollar ($5,000,000) amount.

      • At the rate of 3.5 percent on that portion of a taxpayer’s taxable income over the adjusted five-million-dollar ($5,000,000) amount.

What does this mean?

It means that depending on the amount of income generated, there are additional taxes due for higher income brackets. As a result, very high-income earners may end up paying 16.5% in state tax – in addition to Federal Taxes.

California Wealth & Exit Tax (aka Tax on Wealthy)

California proposed that wealthy Taxpayers should have to pay a “Wealth Tax” due to the value of their wealth – and an exit tax even after they leave, for up to 10 years.

As provided by the Bill AB 2088:

• • • This bill would impose an annual tax at a rate of 0.4% of a resident of this state’s worldwide net worth in excess of $30,000,000, or in excess of $15,000,000 in the case of a married taxpayer filing separately. The bill would describe worldwide net worth with reference to specific federal provisions and would provide that worldwide net worth does not include specific assets, including directly held real property or liabilities related to directly held real property.

    • The bill would also authorize the Franchise Tax Board to adopt regulations to carry out these provisions, including regulations regarding the valuation of certain assets that are not publicly traded.

It is important to note that the wealth would not be limited to the California Borders, and would also include global wealth — although certain assets such as directly held real estate (or liabilities related to it).

Key Provisions of the California Bill

• SECTION 1.

  • PART 27. Wealth Tax

    • CHAPTER  1. General Provisions and Definitions

50301

• • • This part shall be known, and may be cited, as the Wealth Tax Act.

50302

• • • The collection and administration of the tax described in this part shall be governed by the provisions of Part 10.2 (commencing with Section 18401) unless expressly superseded by the provisions of this part.

50303

• • • The Wealth Tax shall be reported with, and is due at the same time as, the annual income taxes of a taxpayer under Part 10 (commencing with Section 17001). The Franchise Tax Board shall amend the Personal Income Tax Forms, and amend or create any other forms necessary, for the reporting of certain assets. Assets that must be reported separately shall include, but shall not be limited to, the following categories:

      • Stock in any publicly and privately traded C-corporation.

      • Stock in any S-corporation.

      • Interests in any partnership.

      • Interests in any private equity or hedge fund.

      • Interests in any other noncorporate businesses.

      • Bonds and interest bearing savings accounts.

      • Cash and deposits.

      • Farm assets.

      • Interest in mutual funds or index funds.

      • Put and call options.

      • Futures contracts.

      • Art and collectibles.

      • Financial assets held offshore.

      • Pension funds.

      • Other assets, excluding real property.

      • Debts other than mortgages or other liabilities secured by real property.

      • Real property.

      • Mortgages and other liabilities secured by real property.

    • (b) For the avoidance of doubt, directly held real property, and mortgages and other liabilities secured by directly held real property, must be listed separately in accordance with subdivision (a), but those items are not considered in calculating the taxpayer’s worldwide net worth under this part pursuant to Section 50306.

CHAPTER  2: California Imposition of Tax on Wealth

50305

• • • For the benefit of accumulating excessive wealth in this state, there shall be imposed an annual tax of 0.4 percent upon the worldwide net worth of every resident in this state in excess of the following:

    • For married taxpayers filing separately, fifteen million dollars ($15,000,000).

    • For all other taxpayers, thirty million dollars ($30,000,000).

      • (1) Except as explicitly provided for in this part, for purposes of subdivision (a) worldwide net worth shall be calculated in the manner set for calculation of the Federal Estate Tax under Chapter 11 (commencing with Section 2001) of Subtitle B of the Internal Revenue Code as that chapter reads as of June 15, 2020.

      • (2) Except as otherwise provided in this part, and only to the extent allowable under the California Constitution, United States Constitution, and other governing federal law, worldwide net worth shall be the value of all worldwide property owned by the taxpayer on December 31 of each year. Any transaction, a primary purpose of which is to reduce the valuation of a taxpayer’s worldwide net worth as of December 31, shall be disregarded. The Franchise Tax Board shall adopt regulations designed to prevent the avoidance or evasion of the tax imposed under this part.

50306

• • • Worldwide net worth shall not include any real property directly held by the taxpayer. However, worldwide net worth shall include the value of real property held indirectly, as through a corporation, partnership, limited liability company, trust, or other such legal form, except to the extent that such inclusion is prohibited by the California Constitution, by the United States Constitution, or other governing federal law.

50308

• • • The value of all assets subject to the Wealth Tax shall be reported annually, but any amount of net-worth wealth tax on those assets paid to another jurisdiction shall be credited against the Wealth Tax. Any credits created by this section, however, shall not exceed the total tax owed under the Wealth Tax. For the avoidance of doubt, this section shall only provide a credit for a tax on net worth, or a tax on real property as described in subdivision (b), and no credit shall be created by any tax on transactions, income, capital gains, or other taxes.

California Exit Tax Proposal

The Exit Tax Proposed by California can have a “10-Year Taint” attached to it if they decide to try to high-tail it out of California as well.

50310

• • • (1) For purposes of this part, a taxpayer is considered a resident of California for a given year, if such taxpayer is a California resident for purposes of the California income tax as determined by Section 17014.

    • (2) Part-Year Resident. A part-year resident is determined as by Section 17015.5. Part-year residents shall be taxed on their worldwide net worth according to this part, but for purposes of calculating such tax, the taxpayer’s worldwide net worth shall be multiplied by the percentage of days in the year such taxpayer was present in this state.

    • (3) Temporary Resident. A taxpayer who spends more than 60 days in California, but who does not qualify as a resident under Section 17014 or part-year resident under 17015.5, shall be treated as a temporary resident. Temporary residents shall be taxed on their worldwide net worth according to this part, but for purposes of calculating that tax, the taxpayer’s worldwide net worth shall be multiplied by the percentage of days in the year the taxpayer was present in this state.

    • (4) Wealth Tax Resident. Any taxpayer with extreme wealth sourced to this state according to the rule of paragraph (3) of subdivision (b).

(b) Special Apportionment Rules for Wealth Tax

• • • General Rule. In general, the portion of a taxpayer’s wealth subject to the tax imposed by this part shall be multiplied by a fraction, the numerator of which shall be years of residence in California over the 10 last years, and the denominator of which shall be 10. For the purpose of calculating the numerator described in the previous sentence, any partial year of residence as calculated under paragraphs (2) and (3) of subdivision (a) and shall be included in the numerator.
    • Special Rule for New Residents. For residents of California who have never been a California resident before, the calculation of the numerator under paragraph (1) of subdivision (b) shall, for the first year of residence in California, be a fraction between 0 and 1, as calculated under paragraph (2) of subdivision (a). For each subsequent year, the number 1 should be added until the numerator reaches 10.
    • Special Rule for Wealth Tax Residents.
      • For taxpayers who were subject to the Wealth Tax in one of the preceding 10 years, and are no longer residents of this state as residence is defined in Section 50310, and do not have the reasonable expectation to return to this state, the calculation of the numerator under paragraph (1) shall be as follows.
        • For the first year of nonresidence in California, a fraction between 0 and 1, as calculated under subdivision (b) of Section 50310,
        • plus the years of residence in California over the nine previous years shall be the numerator. For each subsequent year, the number 1 should be subtracted until the numerator reaches 0.
      • For any taxpayer who pays tax under this part as a former resident, but then returns to California, the apportionment rule shall be the general rule of paragraph (1) of subdivision (b).

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