California Proposes a 16.8% Tax Rate and a Wealth Tax Is It Time To Move Once More?
California Wealth Tax : California politicians have proposed significant tax increases, repeating two unsuccessful tax proposals announced in 2020.
Perhaps this year will be different, with the economy strengthening and the state in desperate need of funds.
One bill would hike the state’s already exorbitant top income tax rate by up to 3.5 percent for those with extremely high incomes. The other option is a contentious wealth tax.
Individual income tax rates currently top out at 13.3 percent, but Assembly Bill 1253 would boost it to 14.3 percent for anyone earning more than $1 million.
Over $2 million, you’ll get a 16.3 percent rate, and over $5 million, you’ll get a 16.8 percent rate.
Even before any planned adjustments, the top 1% of income earners in California pay the majority of the state’s personal income tax revenue (46 percent in 2016).
The bill to raise the tax rate to 16.8% failed last year, but the new bill comes while the economy is improving.
Perhaps California wants to reclaim its position as the leader in terms of rates as well.
New York’s combined city and state tax rates reach 13.53 percent, surpassing California’s 13.3 percent, but 16.8 percent may humble the globe.
The bills arrive at a time when it appears like federal taxes may be raised as well, at least for some.
Since 2018, the amount of state taxes that can be deducted from federal taxes has been capped at $10,000. Paying considerably higher state taxes is even more painful if you pay the planned 39.6% federal rate and can only deduct $10,000 in state taxes.
California has been losing inhabitants to no-tax states such as Texas, Nevada, Washington, Wyoming, and Florida for some time, and it’s not just Elon Musk.
You don’t have to move to a tax-free state to save money. Every other state has a lower income tax rate, either no tax or a lower tax, than California.
In addition, many states, like the IRS, tax capital gains more favourably.
Ordinary income and capital gains are taxed at the same rate in California, up to 13.3 percent —unless the rate is raised.
This causes sellers of stock, Bitcoin, and other assets subject to California’s capital gains tax of 13.3 percent to move and then sell.
The same is true for litigants who move before reaching a settlement in large cases.
Although moving may appear to be simple, you must be thorough and attentive to avoid being asked to continue paying California taxes.
It’s also important to consider the timing. The prospect of a California audit might be daunting, and in some situations, California can assess taxes regardless of where you live.
The IRS can audit for 3 to 6 years depending on the issue, whereas California can audit for an indefinite period of time.
If you never submit an income tax return, California, like the IRS, has an unlimited number of years to audit you.
As a result, continuing to file in California as a nonresident may be a wise decision. That way, you’ll only have to record your California-sourced income and nothing else.
California source income includes rental revenue from California real estate, as well as Schedule K-1s from California partnerships or LLCs that may display some California source income.
Whether you file as a nonresident or not, many people are concerned that saying goodbye to California taxes would mean saying hello to a residency audit.
However, the possibility of an increase in the highest tax rate may cause some people to reconsider.
Reverse immigration is fueled by more than just income taxes. Even for those who simply aspire to be affluent, the recurrent mentions of a wealth tax are concerning.
The wealth tax bill that failed in 2020 is back. California Assembly Bill 310 would impose a 1% annual tax on net worth exceeding $50 million and a 1.5 percent tax on net worth exceeding $1 billion.
It would also necessitate a constitutional revision to raise the present wealth tax cap in the state.
The wealth tax plan for 2020 was unique in that it began with a threshold of $30 million in assets.
There’s no denying that California is a tax pioneer—remember Proposition 13’s property tax revolution?
However, whether a pioneer or not, the administrative nightmare that the nation’s first wealth tax would entail appears to be considerable.
It’s important to remember that this is about accumulated wealth, not income.
It’s not even about a quiet occurrence like death, when estate tax kicks in.
Here would be a yearly tax, which it is, and this is where valuation comes in.
Taxing assets instead of income necessitates extensive appraisal and line-drawing operations.
Percentage interests in legal companies such as partnerships, LLCs, and hedge funds, as well as business interests, would obviously have to be valued.
If you are a Californian who owns 25% of a company in Ohio, the Ohio company may be forced to collaborate as well.
In short, valuation would be difficult and involve judgement calls, and it would impose costs on enterprises outside of California as well.
The exit requirements are one of the more contentious aspects of the proposed tax—a tax that is highly contentious in and of itself. What if you decide to leave California?
The tax appears to be able to catch you for another four years. Even passing through California on a temporary basis could be costly due to the tax implications.
Even if you are a “temporary resident,” the measure suggests that you may be taxed. Assume you’ve spent at least 120 days in California in the previous two years.
Assume that you spent at least 150 days in California in the last four years. In either case, you will undoubtedly be subjected to some form of taxation.
My hazy crystal ball predicts that this measure will be difficult to pass, but who knows.
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