Avoiding California State Income Taxes When Moving Abroad

This is often called the California Safe Harbort Rule for Expatriates.

It is often difficult to give up your obligation to pay California taxes when starting to work abroad.  California is an "Intent State."  That California wants to continue to tax you until you show the intent of moving your tax domicile to another country or state.  They  look at all of the facts and circumstances in retrospect years later to determine if you actually had the "intent" to move your tax residency to another country.

There is a solution to the ambiguities involved with successfully giving up your California residency for tax purposes. That is the Safe Harbor Rule which can be used. Under that rule:

• You must remain living and working outside of California for at least 546 days under a contract of employment;
• You do not have more than $200,000 in investment income;
• You do not return to California more than 45 days during any calendar year.

If you meet these criteria, you are automatically deemed to be a California nonresident for the period you work abroad even though you may still have a California drivers license, voter registration, etc.

It is important to successfully avoid California tax domicile status when living abroad since California does not allow the foreign earned income exclusion or foreign tax credits. If means if you remain a California tax resident a lot of taxes may be due.  If you originally move abroad and later move back to California before the 546 days passes you will owe tax returns for all of the years you were claiming this exception as well as any applicable penalties and interest. If California deems you a resident you owe it taxes on your worldwide income.

Some states make it even tougher to give up the obligation to pay state taxes when working abroad. Virigina and New Mexico are just a few.

We can help you avoid continuing having to pay state taxes when you move abroad to work or retire. Contact us if you have questions or concerns at ddnelson@gmail.com.  Visit our website at www.taxmeless.com   Our US phone is 949-480-1235

Foreign Corporation Form 5471 - File it or else

Form 5471 must be filed by those who own 10 percent or more of a foreign corporation.  It contains information on other US owners, an income statement and a balance sheet.  Failure to file it can cause the nonfiler (if caught) to incur a $10,000 penalty from the IRS.  You must file form 926 also in the initial year to report your capital contribution to the foreign corporation.

If your foreign corporation is inacive and has less than $100,000 in assets and little if any income you may be eligible to file just page one of form 5471. Read more about the filing requirements and special rules that apply if you have failed to file this form at www.taxmeless.com. Email us with questions at ddnelson@gmail.com . We are attorneys and CPAs with the expertise you need.