If you moved into or out of California during the tax year, or spent time in California while domiciled elsewhere, it's important to understand the difference between nonresident and part-year resident status. Filing under the wrong status can result in either overpaying your taxes or triggering a residency audit from the Franchise Tax Board.
Basic Definitions and Concepts
Nonresident: You were not a California resident at any point during the tax year. California can only tax you on income from California sources.
Part-year resident: You were a California resident for part of the year and a nonresident for the remainder. During your resident period, California taxes you on your worldwide income. During your nonresident period, California taxes only your California-source income.
The distinction hinges on whether you had a period of California residency during the year. If you did, you're a part-year resident, not a nonresident, even if you spent most of the year living elsewhere.
If you were a California resident, and moved to a different state, unless you moved on Dec. 31st or January 1st it would be normal to see a part-year resident return for the period of time you were still a California resident. Similarly, when filing your first California return, it would be normal to see a part-year return for the part of the year after your move into the state. While the absence of either these initial or final returns wouldn't typically be enough to trigger a residency audit, it can give the appearance of rounding or estimating the date of move. If California has potential evidence of income that 'might' not have been duly reported to it around the date of a move, an initial or final filing which is not a part-year return can therefore make an audit more appealing to the state.
Part-Year Resident Calculation
Nonresidents only need to identify their California-source income and pay tax on that amount at California rates.
For part-year residents, the calculation is more complex. California will determine your tax rate based on your total income from all sources for the entire year, as if you had been a California resident the whole time. That rate is then applied to your California-taxable income (worldwide income during your resident period plus California-source income during your nonresident period). Because the state has steeply progressive tax rates, using total income to determine the rate applied to California income can result in a tax outcome that is significantly more unfavorable for a part-year resident as compared to a nonresident.
Common Scenarios
Moving out of California mid-year: If you were a California resident on January 1 and permanently moved to another state on July 1, you are a part-year resident. California will tax your worldwide income from January through June, plus any California-source income you earned from July through December.
Moving into California mid-year: If you moved to California on July 1 and became a resident, you are also a part-year resident. California will tax your worldwide income from July through December, plus any California-source income you earned from January through June.
Never a California resident: If you lived in Texas all year but earned income from California sources (say, from rental property in Los Angeles or work performed in California), you file as a nonresident. California taxes only the California-source income.
Working remotely for a California employer (W-2 income): If you lived in Nevada all year and worked remotely for a California company, performing all your work from Nevada, you are a nonresident with no California-source wage income. The employer's location doesn't control; what matters is where you performed the services.
Working in California temporarily (W-2 income): Receiving W-2 income during a temporary stay does not make you a California resident or part-year resident. The state can of course contest whether the stay is temporary or not, but if the stay is indeed of a temporary nature the appropriate approach is to file as a nonresident paying tax to California only on California source income, using a rate determined only by the amount the California source income.
California Source Income
For W-2 employees, the sourcing rule is straightforward: income is sourced to where services are physically performed. If you work in California, that income is California-source. If you work remotely from Nevada for a California employer, the income is Nevada-source. The employer's location is irrelevant; what matters is where you were sitting when you did the work. For employees who split time between states, income is typically allocated based on workdays in each location.
For independent contractors and sole proprietors receiving 1099 income, California applies market-based sourcing rules. Under these rules, income from services is generally sourced to where the customer receives the benefit of the service, not where the contractor performs the work. A consultant living in Texas who provides services to California clients may have California-source income even if no work is performed in California. The rules are technical and fact-specific; the FTB provides detailed guidance on market-based sourcing for those navigating these situations.
Real estate income is sourced to where the property is located. Rent from a California property is California-source income regardless of where the owner lives. The same applies to gain on the sale of California real estate. This is why nonresidents who sell California property still owe California tax on the gain, and why California requires withholding on real estate sales to out-of-state sellers.
For K-1 income from partnerships, S corporations, LLCs, and trusts, the sourcing follows the underlying activity of the entity. If you're a nonresident partner in a partnership that operates in California, your share of that partnership's California-source income is taxable by California. In the vast majority of cases this California income would be reflected on a California K-1. This can sometimes catch nonresidents off guard; simply being a passive investor in an entity with California operations can create a California filing requirement and tax liability.
Common Mistakes
Filing as nonresident when you're actually a part-year resident: This is perhaps the most common error. If you lived in California for any portion of the year and then moved away, you're a part-year resident for that year, not a nonresident. Filing as a nonresident when you should file as part-year resident understates your California tax liability and can trigger an audit.
Misunderstanding the rate calculation: Part-year residents sometimes assume their California tax will be based only on the income earned during their California residency period, calculated at the brackets that apply to that amount. The actual calculation uses total income to determine the rate, which often results in a higher tax than expected.
Overlooking California-source income during the nonresident period: If you move out of California but continue to have California-source income (rental properties, partnership interests, deferred compensation, stock options with California service periods), that income remains taxable by California even during your nonresident period. Some taxpayers mistakenly believe that once they've left, California can't tax any of their income.
Incorrect determination of the residency change date: Residency doesn't automatically change on the day you physically relocate. If you moved your belongings to Nevada on March 15 but your spouse and children stayed in California until the school year ended in June, FTB may argue your residency didn't change until June. The date of your residency change should be supportable based on the totality of the circumstances, not just when the moving truck arrived.
Complex Scenarios
Some situations make the nonresident/part-year resident determination genuinely difficult. If you split time between California and another state throughout the year without a clear move date, determining whether you were ever a California resident (and if so, when that residency began or ended) requires careful analysis of the factors FTB uses to evaluate residency.
Similarly, if you left California but FTB later determines your departure was for "temporary or transitory purposes," you may be reclassified as a full-year resident, not even a part-year resident. This is the scenario that leads to the largest unexpected tax bills: the taxpayer believed they had left California, filed as a nonresident or part-year resident, and FTB determines they were actually a resident the entire time.
Understanding where you fall on the residency spectrum is the foundation of correctly filing your California return. If your situation involves a move, extended time in multiple states, or significant income, getting this determination right is worth professional attention.