Discussion:Client's Moving to Nevada for One Year

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Discussion Forum Index --> Advanced Tax Questions --> Client's Moving to Nevada for One Year


Discussion Forum Index --> Tax Questions --> Client's Moving to Nevada for One Year

Cwmfirm (talk|edits) said:

31 July 2008
I have a client that is retiring as of 12/31/08. He will be getting a couple

large sums of money in 2009. 1) the last payment from the sale of a business (all cap gains) 2) cashing out his deferred compensation plan (all ordinary income). My client wants to move from CA to NV for all of 2009. He will be buying a home late in 2008 in NV but keeping a home in CA (renting it to his son). My client intends to move back full time to CA in 2010, but if he likes it he may stay. A couple of questions to sort out....

1) Is deferred compensation plan income paid after retirement still taxed in the state where it was originally earned (years prior)?

2) Even if it's just a year, can't we claim that my client was a resident in NV for 2009? (He will be purchasing a home, joining a country club, have NV license, etc.)

3) Any questions anyone think I left out?

RoyDaleOne (talk|edits) said:

31 July 2008
Yes, the question of domicile has some good discussions, including, CA and NV.

Trying searching for KatieJ's responses on this subject, you need to read them.

Joanmcq (talk|edits) said:

31 July 2008
CA won't buy it. Trust me. 1. He keeps a home in CA. He intends to move back to CA. He knows in advance he will receive a large sum of money while living in NV. The main purpose of moving to NV is tax avoidance. CA is really, really aggressive on this issue and the facts as you present them leave him with a big target.

Donniecastleman (talk|edits) said:

31 July 2008
Tell you client to come to Nevada and stay here, it's a nice place to live and do business, it's more than you see on tv about being all casinos and strip joints, there's a lot of businesses based here and a bunch of nice people and a ton of churches, as well as no state tax so far, but our stupid government is making an eventual state income tax a grim reality, but for now, there's not. It's a great time to buy property in Nevada as everything is on sale, he could buy a nice big piece of property and probably double his money over a 5 year period.

Michaelstar (talk|edits) said:

1 August 2008
CW - the issue you and your client will face if audited on this will be that the FTB will be able to look back and make their determination based on your clients actions. Leaving CA for NV for one year will not cut it. As Joanmcq has pointed out - the FTB is very agressive and when there is lots of tax to collect, they have a history of contacting the t/p in situations such as you are describing.

DZCPA (talk|edits) said:

1 August 2008
It will probably work. I have not seen more than 4 California tax audits in the past 20 years. My partner & I have prepared over 40,000 tax returns. Most audits are brought on by the IRS with California making adjustments for the net change.

RoyDaleOne (talk|edits) said:

1 August 2008
http://www.taxalmanac.org/index.php/Discussion:Foreign_Income_Tax_Exclusion_-_Federal_vs._State

Death&Taxes (talk|edits) said:

1 August 2008
Read my last comment in Discussion: NJ non-resident return (living in PA working in NJ). While the Dorrance case is relatively ancient history, Mr. Dorrance's bones and effects were found to be in residence in two states.

Joanmcq (talk|edits) said:

1 August 2008
DZ, have you had clients that moved to NV to avoid tax for a year??? I've been seeing notices right and left, even for small amounts on all sorts of returns. Heck, one of my clients who is 1st on the mortgage is disabled, and his spouse has been paying the mortgage. Has gotten requests for a return for the last three years based solely on the fact that a 1098 was issued in his name. The 1st year they did an SFR based on the mortgage interest; basically quadrupled it and declared that he must have had that much income. Thank god they could file joint this year. What cwm's client wants to do is a big, big target.

DZCPA (talk|edits) said:

1 August 2008
Clients move to no tax states all the time. The federal return is the same for all states. I'm saying, I have not seen any (few) CA individual generated audits. Maybe its different for returns filed by gay taxpayers. I only have a handful of those taxpayers.

Death&Taxes (talk|edits) said:

1 August 2008
As Roy states, read Katiej's posts, or post a message to her directly. I read this to say that the client is not changing his domicile and that the place his heart is would be California.....seems like it is the place to which he will return when all is said and done.

KatieJ (talk|edits) said:

7 August 2008
DZ, it's true that people move to no-tax states all the time, and as long as they move there and stay there, they have no problem with California. The ones that have a problem are those that retain ties in California and return to California after having conveniently received a large amount of income during the period of supposed nonresidence -- such as the stock sale or retirement plan cashout that Cwm's client expects. Believe me, if Cwm's client moves to Nevada, leaving his home in California occupied by a relative, and returns a year later, California will take the position that he remained a resident during his supposed absence. If he cannot document his intention to make his move to Nevada permanent, he'll lose.

Also, the odds of Cwm's client being audited by the FTB are fairly high, especially if the excluded income is substantial. The FTB has a large contingent of auditors who do nothing but residency and income sourcing audits. Some are based in Sacramento and some in district offices around the state, but residency and sourcing issues are their specialty.

California defines a tax resident to include all individuals who are present in the state for a purpose that is not temporary or transitory, and all individuals domiciled in California who are absent for temporary or transitory purposes. Cal. Rev. & Tax. Code Sec. 17014. In order to change his domicile to Nevada, Cwm's client must meet all of three requirements: (1) Move away from California (sever his ties to the state); (2) move to and reside in a new location; and (3) intend to remain in the new location permanently or indefinitely. If he intends to be gone for only a year or so, he will not meet the third requirement. He will remain a California domiciliary, and his absence will be demonstrably temporary. So, he will be a resident and all of his income will be subject to California tax.

Let's assume the client really moves to Nevada, intends to stay there, and in fact does stay there. In that case, he will be a nonresident of California. Whether the sale of the business results in California source income depends on the structure of the transaction. If he sells the assets of the business, or the assets are sold by an S corporation, partnership, or LLC taxed as a partnership or disregarded entity of which he is an owner, the gain will be California source income (taxable to a nonresident) to the extent the assets are located in California. If he sells stock in a corporation (C or S), or his interest in a partnership or LLC, the gain arises from the sale of an intangible and has its source at the residence of the owner -- in this case, Nevada -- and will not be subject to California tax.

Federal law (4 USC Sec. 114) prohibits states from taxing certain retirement income of nonresidents on a source basis. Qualifying income includes (1) distributions (including lump sum distributions) from tax-qualified plans, (2)income from nonqualified plans that is receivable in a series of substantially equal payments over the recipient's life or joint life expectancy or over a period of not less than 10 years, or (3) income from a nonqualified plan that was established to provide highly compensated employees with benefits not available from a qualified plan due to ERISA restrictions, and received after termination of employment. Therefore, if the retirement plan is a qualified plan, such as an IRC Sec. 401 plan, Sec. 403(b) annuity, IRA, Sec. 457 plan, government or military plan, or Sec. 501(c)(18) trust, and the client is a nonresident when he cashes it out, the income will not be subject to California tax even if he performed 100% of the services to earn it in California. However, if the plan is a nonqualified plan that does not meet definition (3) above, and he takes it out in a lump sum or over a period of less than 10 years, it will be subject to California tax to the extent that he performed the services to earn it in California.

Cwmfirm (talk|edits) said:

12 August 2008
Wow....Thanks everyone for your responses, especially KatieJ. Thank you for taking the time.

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