California's tax system can be overwhelming and confusing. Both individual taxpayers and businesses may run into several state tax issues. These problems could end up costing you huge penalties and fines if you don't handle them correctly.
An experienced California tax attorney can let you know which state tax issues to look out for and help you mitigate potential problems.
Part-Time Residents
A big issue that often comes up for California taxpayers is residency. Many people who only spend part of the year in California, or who have left California, end up paying high taxes because of how the state's Franchise Tax Board (FTB) classifies residents. Some people who don't consider themselves residents of California and only spend a short time in the state, might still find themselves classified as part-year residents, and therefore liable for taxes. A vacation home, business interests, or extended visits to the state — coupled with significant taxable income might lead to an FTB audit.
Relocating Your Business
Some business owners consider moving out of California because of the high income tax rates, or because they want to expand to other states. Businesses operating outside the state don't have to pay taxes to California—unless their customers are in California. California taxes nonresidents if the source of their income is situated in California. If you move your business operations to another state but continue to sell to customers in California, your income is taxable by the state. Another obstacle business owners must consider is that California can tax the revenue of LLCs or S corporations operating in California, even if the owner is a nonresident.
Moving Overseas
Californians who want to move to another country may face significant tax hurdles. The FTB usually assumes that you're moving abroad temporarily and still holds you responsible for state taxes. It takes a substantial severing of ties to legally release your California residency. For example, holding onto a driver's license or bank account show an intent to return, according to the FTB. California residents who move and work abroad are also not exempt from double taxation treaties the U.S. has with other countries. These treaties prevent expats from paying tax to both their hosting country and the U.S., but California doesn't recognize these treaties and still assesses state taxes on expats.
Common Audit Mistakes
Avoiding mistakes on your tax returns and audits will make dealing with the FTB much easier. The FTB has identified common mistakes on tax returns that may lead to audits:
- Improper deductions related to medical expenses
- Incorrect information regarding charitable contributions
- Errors related to job expenses such as mileage reimbursement
- Incorrectly claiming the Head of Household status
- Issues related to the Other State Tax Credit
- Not reporting changes to federal taxes
Questions About California State Taxes
A qualified tax professional can help address tax problems you may have in the state of California, whether you're a resident or business owner. Contact a California Tax Attorney today for an initial consultation.