Federal taxes get most of the attention, but state taxes can be a significant part of the total bill, particularly in a high-tax state such as California. State rules also differ in ways that matter for planning: which income is taxed, how residency is determined, and what happens when you move or sell a major asset.
State tax planning is about understanding those rules and building them into decisions before they are made. This guide covers the main concepts, with a focus on how California approaches them, so you can have a more informed conversation with your tax professionals.
How States Tax Individuals
States with an income tax generally follow two broad principles.
Residents: Generally taxed on all of their income, wherever it is earned.
Nonresidents: Generally taxed only on income sourced to that state, such as wages for work performed there, rental income from property located there, or business income apportioned there.
Part-year residents are usually taxed as residents for the portion of the year they lived in the state and as nonresidents for the rest.
How California Determines Residency
California looks at whether you are in the state for something other than a temporary or transitory purpose, or whether you are domiciled in California and outside the state only temporarily. Spending more than nine months of a year in California creates a presumption of residency, but time is only one factor.
Factors the State May Review
Home: Where you own or rent a home, and its size and use compared with other residences.
Family: Where your spouse and children live and where children attend school.
Connections: Driver's license, voter registration, vehicle registration, and professional licenses.
Financial ties: Location of bank accounts, business interests, and advisors.
Daily life: Doctors, clubs, religious organizations, and where you spend most of your time.
Because the analysis looks at the whole picture, moving a few items while keeping others in California may not be enough to change residency for tax purposes.
How Income Is Sourced
Even after a move, some income may still be taxed by the state you left.
Wages and Equity Compensation
Compensation for work performed in a state is generally sourced there. For stock options and restricted stock, California may tax the portion of the income tied to time you worked in the state, even if you exercise or vest after moving.
Retirement Income
Federal law limits states from taxing nonresidents on many types of retirement income, such as distributions from qualified plans and IRAs. Some nonqualified deferred compensation payments can also qualify, depending on how they are paid.
Investment Gains
Gains from selling stocks and other intangible assets are generally sourced to your state of residence at the time of the sale. Gains on real estate are generally sourced to where the property is located.
Installment Sales
If you sell an asset while a California resident and receive payments over time, California may continue to tax those payments after you move.
California-Specific Considerations
Capital gains: California taxes capital gains as ordinary income, so there is no separate lower state rate for long-term gains.
Additional tax on higher incomes: An extra 1% tax applies to taxable income above a threshold, which can affect the year of a large sale or exercise.
Municipal bond interest: Interest from California municipal bonds is generally exempt from California tax, while interest from other states' bonds generally is not.
Pass-through owners: California has offered an elective pass-through entity tax that can affect how owners of partnerships and S corporations handle the federal limit on state and local tax deductions. Availability depends on current state law, so it is worth confirming each year with a CPA.
Trusts: California may tax certain nongrantor trusts based on where fiduciaries and beneficiaries live. In 2023, the state changed its rules so that certain incomplete gift nongrantor trusts are treated as grantor trusts for California purposes.
Planning Around a Move
Some people consider relocating as they approach retirement or a liquidity event. If a move is part of the plan, a few points can help:
Timing: The date residency changes can affect which state taxes a large gain or bonus.
Documentation: Keeping records of travel days, the sale or lease of a prior home, and updated registrations can support a change of residency.
Substance: Building real ties in the new state, not just changing an address, tends to matter in an audit.
Equity and deferred pay: Understanding how unvested grants and deferred compensation will be allocated between states before you move.
Total cost: Comparing property taxes, sales taxes, insurance, and cost of living alongside income tax.
Our article on the cost of waiting looks at how postponing decisions can narrow the options available.
Planning Without a Move
For California residents who plan to stay, moving is not part of the picture. State tax planning can still play a role in day-to-day decisions.
Timing income: Spreading the sale of appreciated assets across tax years can help manage exposure to higher brackets.
Pairing gains and losses: Harvesting losses can offset gains for both federal and state purposes, a topic covered in our article on tax loss harvesting.
Retirement contributions: Contributions to workplace plans can reduce taxable wages. Annual limits apply.
Charitable gifts: Gifts of appreciated assets can reduce income and avoid tax on the gain, subject to deduction rules.
Account location: Holding certain investments in tax-advantaged accounts can reduce current taxable income.
Multi-State Situations
Households with homes, businesses, or rental properties in more than one state can owe tax in several places. States typically offer a credit for taxes paid to another state on the same income, but the rules vary, and the credit may not fully offset the second tax. Business owners may also have filing obligations in states where the business has customers or employees. Keeping a list of every state where you earn income, own property, or have a business presence can make it easier for your CPA to spot obligations and credits.
How Auric Approaches State Tax Questions
Auric Capital Partners is based in Aliso Viejo, California, and meets with clients in person and virtually. The firm's tax minimization strategies focus on helping investment and planning decisions support after-tax outcomes, which often means working with a client's CPA on the timing of sales, exercises, and distributions. State tax rules are part of that analysis.
For executives weighing an equity exercise, business owners approaching a sale, and retirees thinking about where to live, the firm coordinates planning with the client's tax and legal professionals. You can read more about how the firm works on our About page.
Let's Connect
If state taxes are becoming a larger part of your planning, a conversation can help you organize the questions to bring to your CPA. Get in touch with our team to set up a time.
Frequently Asked Questions
What is state tax planning?
State tax planning means considering state income tax rules, residency, and income sourcing when making financial decisions, such as selling assets, exercising stock options, or relocating.
How does California decide if I am a resident?
California looks at whether you are in the state for more than a temporary or transitory purpose and where you are domiciled. It considers factors such as your home, family, registrations, financial ties, and time spent in the state.
Will California tax my stock options after I move?
It may. California can tax the portion of option or restricted stock income tied to work performed in the state, even if you exercise or vest after moving.
Can California tax my retirement account distributions after I leave?
Federal law generally prevents states from taxing nonresidents on distributions from qualified retirement plans and IRAs. Other types of income may still be taxable.
Does California tax capital gains differently?
California taxes capital gains as ordinary income, so long-term gains do not receive a lower state rate.
This content is for educational and informational purposes only and should not be considered investment, tax, or legal advice. It is not a recommendation to buy or sell any security or to adopt any particular investment strategy. Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results, and no strategy can guarantee a profit or protect against loss. Please consult with a qualified professional about your individual situation. Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Adviser. Auric Capital Partners is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.
