Understanding the California Exit Tax in 2024
When leaving California, you may be required to pay the California exit tax. This tax is designed to take a portion of any assets that might otherwise escape taxation in California due to the move. But how does the California exit tax work, and how can you avoid it?
Here’s what you need to know.
What Is the California Exit Tax?
The proposed California exit tax would tax residents who move out of California with certain types of income or gains. This would ensure that California can tax capital gains and other income that residents earned while living in the state but might not realize until after leaving.
Triggering events for this tax include:
- Earning a high income
- Selling a home
- Exercising stock options
How Much Do You Pay in the California Exit Tax?
The California exit tax rate is 0.4% on any part of your net worth exceeding the $30 million threshold for individuals or $15 million for anyone married and filing separately. For example, if your net worth is $40 million, you would owe an exit tax of $40,000 (0.4% of $10 million, the amount exceeding the $30 million threshold).
This tax calculation excludes California real estate, which is taxed separately.
Who Needs to Pay the California Exit Tax?
The California exit tax applies to residents with significant income or investments who are leaving the state. You may have to pay an exit tax if you:
- Earn a high income
- Own valuable assets
- Have unrealized capital gains
Most California residents with a moderate income will not be subject to the exit tax.
Why Was the California Exit Tax Created?
The California exit tax was designed to close a loophole in the capital gains tax system. By ensuring that residents who move out of state still pay taxes on gains accrued while living in California, the state can avoid missing out on taxes from wealthy individuals moving away.
The California Wealth Tax Proposal
In addition to the exit tax, California has proposed a wealth tax to help the state gain revenue from its wealthiest residents. This proposal would tax individuals based on their total wealth, including assets held both within and outside of the state. The wealth tax aims to address income inequality and generate additional revenue for state programs.
California Exit Tax FAQs
How can I avoid the California exit tax?
Avoiding the California exit tax requires careful planning. This might include:
- Strategically timing the realization of capital gains
- Using tax-advantaged accounts
- Consulting with a tax professional to explore legal tax minimization strategies
Do I pay California taxes if I work remotely?
If you move out of California but continue to work remotely for a California-based company, you may still owe California income taxes. The state generally taxes income earned from California sources, regardless of where you live.
Does California tax out-of-state capital gains?
California taxes capital gains based on residency and the source of the income. If you earned capital gains from assets or activities in California, you might owe taxes on those gains even after moving out of state.
If I make less money, do I have to pay the exit tax?
The California exit tax is primarily aimed at high earners and those with significant unrealized capital gains. If your income and assets fall below certain thresholds, you may not be subject to this tax. However, it’s important to review your specific situation with a qualified tax professional.
Have to Pay the California Exit Tax? Let Greenback Help!
The California exit tax can be complicated. Having the right help in your corner can make all the difference.
At Greenback Expat Tax Services, we help Americans around the world manage their US tax strategies. Founded by expats and for expats, Greenback specializes exclusively in international taxes. Our team of IRS Enrolled Agents and CPAs have helped more than 18,000 clients in 193 countries. With over 60,000 tax returns filed, we have the experience you need to get the most out of your finances.
Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.
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