California residents that leave the state risk audits

Now that the federal government has raised the tax rate for the country's top earners to 39.6 percent, many people are deciding to leave California, which also raised its highest tax rate from 10.3 percent to 13.3 percent, for a state with lower personal income tax rates. Some people are even hunting for states that have no personal income tax at all. The problem is that states, including California, are beginning to notice the trend and are starting to commence audits on residents that leaving the state.

In addition to rising personal income tax rates for top earners in California at both the state and federal level, the federal government has increased the tax liability on capital gains from 15 percent to as much as 23.8 percent. As if this wasn't bad enough, states are now reaching out to get their share of investment taxes from former residents or part-year residents. One state is even attempting to lower the length of time people can reside in their state without becoming liable for taxes from 182 days to 60 days in order to gain more revenue for the state.

People who file part-year tax returns or somehow indicate they are no longer residents of a state are now at risk for an audit. Audits can take weeks, months, or even years. The process can tempt many people to settle with the state to end the audit.

People are having to prove that they are actually severing ties with their former state and setting up a new life in their new state in response to audits. Getting a new driver's license, moving investments and canceling organizational memberships in the former state are all evidence that a party is establishing ties in their new state and establishes a time frame of when they stopped being the resident of their former state. Anyone that finds they are the subject of an audit by their former state may benefit from advice and assistance in dealing with the taxing authority.

Source:, "NEW YORK: States crack down on top earners who flee as taxes rise," Margaret Collins, March 19, 2013

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