California Wealth Tax Proposal (2021 Update)

California Wealth Tax Proposal (2021 Update)

California Wealth Tax Proposal (2021 Update)

California Wealth Tax: Recently, a bill was proposed in California that would increase tax on the wealthiest tax residents of California — in addition to all the taxes already due to CA and the IRS. It is referred to as the “California Wealth Tax.” As you can imagine, that bill had many detractors — not only based on its content, but on the way it is written as well. First, there is a tax just for having wealth. Next, there is an increased tax rate for income generated by certain wealthy residents. Finally, even when a person wants to leave California, there is another tax that can last up to 10 years — simply because a resident of California has left the state — similar to the US Exit Tax. This is very troubling for California residents, as California is already known for having one of the longest “long-arm statutes” out of all the states — and oftentimes seeks to enforce residence rules based on what most people would consider to be less than “minimum contacts.” Let’s review the California Wealth Tax.

What is a Resident for California Tax Purposes

  • As provided in California Revenue and Taxation Code (17014)

    • (a) “Resident” includes:

      • (1) Every individual who is in this state for other than a temporary or transitory purpose.

      • (2) Every individual domiciled in this state who is outside the state for a temporary or transitory purpose.

    • (b) Any individual (and spouse) who is domiciled in this state shall be considered outside this state for a temporary or transitory purpose while that individual:

      • (1) Holds an elective office of the government of the United States, or

      • (2) Is employed on the staff of an elective officer in the legislative branch of the government of the United States as described in paragraph (1), or

      • (3) Holds an appointive office in the executive branch of the government of the United States (other than the armed forces of the United States or career appointees in the United States Foreign Service) if the appointment to that office was by the President of the United States and subject to confirmation by the Senate of the United States and whose tenure of office is at the pleasure of the President of the United States.

      • (c) Any individual who is a resident of this state continues to be a resident even though temporarily absent from the state.

    • (d) For any taxable year beginning on or after January 1, 1994, any individual domiciled in this state who is absent from the state for an uninterrupted period of at least 546 consecutive days under an employment-related contract shall be considered outside this state for other than a temporary or transitory purpose.

      • (1) For purposes of this subdivision, returns to this state, totaling in the aggregate not more than 45 days during a taxable year, shall be disregarded.

      • (2) This subdivision shall not apply to any individual, including any spouse described in paragraph (3), who has income from stocks, bonds, notes, or other intangible personal property in excess of two hundred thousand dollars ($200,000) in any taxable year in which the employment-related contract is in effect. In the case of an individual who is married, this paragraph shall be applied to the income of each spouse separately.

      • (3) Any spouse who is absent from the state for an uninterrupted period of at least 546 consecutive days to accompany a spouse who, under this subdivision, is considered outside this state for other than a temporary or transitory purpose shall, for purposes of this subdivision, also be considered outside this state for other than a temporary or transitory purpose.

      • (4) This subdivision shall not apply to any individual if the principal purpose of the individual’s absence from this state is to avoid any tax imposed by this part.

Imposition of California Wealth Tax (Chapter 2, AB 2088)

Key sections of the bill, include:

50305

  • For the benefit of accumulating excessive wealth in this state, there shall be imposed an annual tax of 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.

50310

      • (3) Special Rule for Wealth Tax Residents.

        • (A) 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.

What does this Mean?

It means that California is seeking to enforce a bill which taxes certain wealthy residents on the value of their net-worth — along with a portion of the income that is earned. in addition, In addition, after the taxpayer exits California they may still be subject to tax for up to 10 years in what would be deemed an exit tax.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

Contact our firm for assistance.