Leaving the Bay Area (or California altogether) was a hot topic during the early years of the pandemic. In 2020, many people left the expensive Bay Area, which led to massive drops in SF rents. I was interviewed on KQED Forum in September 2020 on this topic (I come in at the 37:18 mark). Almost All Bay Area counties increased in population from 2023 to 2024, however.
California remains among the highest income tax states in the US, so leaving the state would (seemingly) reduce your taxes.
Let’s explore the financial and legal implications of leaving California.
Leaving the Bay for Other Parts of California
Mark Zuckerberg made headlines when he announced that Facebook employees may face pay cuts if they move to cheaper areas. Zuckerberg emphasized the importance of reporting the accurate location of residence for tax purposes. You should speak with your employer before you move to ensure they’re okay with you working remotely, and to understand the potential impact on your compensation.
The Information (subscription required) published a detailed article on remote workers facing steep pay cuts for leaving the Bay Area. The takeaways from this article include:
- Software developers outside of the Bay area earn significantly less
- The Bay Area pay premium sometimes offsets high costs
- Facebook’s plans stir debate over geography-based pay policies
- Salaries are determined by formulas based on geographic areas
Based on my conversations with clients, pay cuts only apply to base and bonus, but not RSUs. Remember that your equity compensation is also a key component of your total comp. Ask your employer if future refresher grants will be reduced if you move.
Permanently Leaving California
The classic maneuver by wealthy Californian retirees is to tiptoe over the state border and retire in Incline Village, NV in the Lake Tahoe region. State income taxes are a big reason for this: California’s marginal tax bracket tops out at 13.3%, while Nevada is one of nine states that don’t levy an income tax.
But California and New York are notoriously aggressive about auditing taxpayers who move to a low- or no-tax state. California sets a high bar for you to prove you’ve truly left California.
California’s Franchise Tax Board uses 29 factors to determine whether you’re a resident under California law. This is based on the 1985 case Corbett v. Franchise Tax Board.
The FTB can even resort to reviewing your Internet searches and credit card charges to see if you’re still going to the same hairstylist and doctor. You need to demonstrate that you’ve moved based on the 29 Corbett factors, including:
- Selling your California home
- Updating the address on file with your employer
- Taking your pets to your new home. The New York Division of Tax Appeals ruled in favor of Gregory Platt, who moved from NY to TX (a no income-tax state). One of the factors was because he took his dog with him to Dallas
- Changing driver’s license and car registration (for you and spouse if you’re married)
- Changing voter’s registration
- If you need a storage unit, renting it in your new state (NOT California)
- Filing tax return in the new state
- Changing your doctor, dentist, etc
Wealthy inventor Gilbert Hyatt moved from California to Nevada. After a 28-year legal battle with California, he was unable to prove Nevada residency: California wins in Supreme Court after 28-year fight with inventor.
You Might Still Owe California Income Taxes
Leaving California doesn’t mean you’ll avoid all California income taxes. Even if you’re able to change your state residency, California will still tax you on all California-source income. This includes:
- Sales of California property
- Rental income from California property
- Stock options that vested while you lived in California
- Double-trigger RSUs that vested while you lived in California based on the time-based criteria (1st trigger). Even if you leave California before the IPO occurs (when you meet the 2nd trigger), a portion of the RSU income will still be subject to CA state income tax.
Legal Considerations for Moving to Another State
Update Your Estate Plan
Your estate plan includes your will and health care document. These documents are state-specific, and it’s best to hire an estate planning attorney in your new state. Share a copy of your California estate planning documents with your new attorney.
Update Your Post-nup
If you have a post-nuptial (“post-nup”) marital agreement drawn in California and you move to a non-community property state, you may want to update the post-nup to nullify community property laws. If you have a pre-nup, the agreement should already take care of this. You can read more about this here.