California Exit Tax in 2025: What Expats Need to Know 

If you’re researching whether California charges an “exit tax” when you move out of state or abroad, you’ve likely encountered conflicting information online. Some sources claim California has an exit tax, others discuss proposed legislation, and many confuse state rules with federal expatriation taxes.

California does not have an exit tax. A proposed wealth tax with exit provisions (AB 259) died in committee in 2024. However, California’s aggressive residency rules mean you could face ongoing worldwide income taxation if you don’t properly establish non-residency when moving abroad—which can be far worse than any one-time exit tax.

Important distinction: This article covers California state tax rules. If you’re researching the federal U.S. exit tax that applies when renouncing citizenship, that’s a completely separate issue with different rules and requirements. Read our full guide on the Federal U.S. exit tax here.

The Reality: No Exit Tax, But You Still Need a Smart Exit Strategy

Despite all the online confusion, California doesn’t currently have an active exit tax. So why does everyone keep talking about it?

The term “California exit tax” has become shorthand for the state’s notoriously aggressive approach to former residents. California is what we call a “sticky state”—meaning it’s particularly difficult to prove you’ve truly left for tax purposes. The state fights hard to keep you paying taxes, even after you’ve physically moved away.

Here’s what actually matters for your planning: While there’s no one-time payment when you pack up and leave California, you could face massive ongoing tax obligations if California still considers you a resident. For many of our clients, this ongoing trap would be far more expensive than any exit tax.

The bottom line: The real challenge isn’t paying to leave—it’s proving you’ve actually left in a way that satisfies California’s Franchise Tax Board (FTB). Get this right, and you’ll save thousands (or even hundreds of thousands) in taxes every year going forward.

What Was Actually Proposed (And Why It Still Matters Today)

Understanding what was almost implemented helps explain why proper departure planning is so crucial for your financial future.

Assembly Bill 259, introduced in 2023, would have created California’s first true exit tax. Here’s what it would have looked like:

The Proposed Wealth Tax Structure: 

The bill aimed to establish:

• 1% annual tax on worldwide net worth above $50 million ($25 million for married filing separately) 
• An additional 0.5% surtax on net worth above $1 billion 
• Applied to all California residents, regardless of where their assets were held

The “Exit Tax” Component That Had Everyone Worried

The proposed exit tax would have been 0.4% of net worth exceeding $30 million for individuals ($15 million for married filing separately) when leaving California. This was specifically designed to capture unrealized capital gains before wealthy individuals could relocate to avoid California taxes.

Why It Failed

The proposal died in committee in January 2024 because:

• Governor Newsom opposed the measure 
• Business groups mounted significant opposition
• Constitutional concerns about interstate commerce arose
• Practical implementation proved too challenging

What this means for you: While you don’t need to worry about an exit tax today, the fact that such aggressive measures were seriously considered shows just how important it is to properly plan your departure from California’s tax system. Future proposals could be more successful.

California’s Current Tax Rules: What You’re Actually Dealing With

Even without an exit tax, California’s existing tax system creates significant challenges for anyone trying to leave. Understanding these rules helps you plan your exit strategy effectively.

The Basic Framework That Affects Your Taxes

If California considers you a resident: You’ll pay tax on your worldwide income, regardless of where you live or where that income is earned. This includes your foreign employment, foreign investment income, and income from other states. For high earners, this can mean paying California’s top rate of 13.3% on everything you make globally.

If you’re properly established as a non-resident: You’ll only pay California tax on income that has a California source, such as rental income from California real estate or business income from California operations.

The challenge you face: California fights aggressively to keep you in the “resident” category, even after you’ve moved away. They have sophisticated audit procedures designed to catch people who think they’ve escaped but haven’t properly severed their ties.

What California Can Still Tax After You Leave

Even if you successfully establish non-resident status, California isn’t finished with you. The state can still reach several types of income, and understanding this helps you plan more effectively:

California-Sourced Income:

• Rental income from California real estate
• Capital gains from selling California property
• Wages for any services you perform in California (even brief consulting work)
• Business income from California operations
• Partnership or S-corp income from California entities

Delayed/Deferred Compensation:

California often claims the right to tax:

• Stock options that vested while you were a California resident, even if you exercise them years later
• Pension income, depending on where and when the benefits were earned
• Deferred compensation arrangements you entered into while living in California
• Restricted stock that becomes unrestricted after you move

The Big Risk—If You’re Still Considered a Resident: This is where the real financial danger lies. If California successfully argues that you’re still a resident, they want tax on everything—your salary from your new state, your foreign investment income, your worldwide business profits. Everything. We’ve seen clients face tax bills in the hundreds of thousands because they didn’t properly establish non-residency.

How California Determines Residency (The “Close Connection” Test)

The California Franchise Tax Board (FTB) doesn’t just take your word for it when you say you’ve moved. They use what’s called a “close connection” test, and they’re extremely aggressive about enforcing it. Understanding their process helps you build a strong case for your departure.

What Puts You on Their Audit Radar

The FTB focuses its enforcement efforts on:

• High-income earners (if you’re making significant money, you’re definitely on their radar)
• People with substantial California assets
• Anyone who maintains what they consider significant ties to California
• Former residents who spend considerable time in California after moving

The Investigation They’ll Conduct

During a residency audit, the FTB will examine every aspect of your life. Here’s what they’re looking for:

Your Physical Presence and Lifestyle:

• How much time you spend in California versus your new location
• Where you sleep most nights throughout the year
• Your travel patterns and documentation (they’ll request detailed records)

Your Principal Residence (This Is Critical):

• Where your main home is located and how you use it
• Whether you kept any California real estate (keeping a “luxury home” raises red flags)
• The nature and use of any California property you maintain

Your Professional and Personal Relationships:

• Location of your doctors, dentists, lawyers, and accountants
• Where your children attend school
• Club memberships and social connections
• Professional associations and business relationships

Your Official Records and Documentation:

• Driver’s license and vehicle registration
• Voter registration (and where you actually vote)
• Bank account locations and where you open new accounts
• Where you receive mail and maintain official addresses

Your Financial Life and Business Connections:

• Location of investment accounts and financial advisors
• Where you conduct business activities
• Tax return filing addresses and preparer locations
• Insurance policy details and beneficiary information

Important Note: The FTB is particularly suspicious if you maintain what they consider a “luxury home” in California, even as a second residence. This single factor can trigger costly audits.

Your Step-by-Step Guide to a Clean California Exit

If you want to avoid ongoing California tax obligations and protect yourself from future audits, you need to be systematic about severing your ties.

Phase 1: Strategic Pre-Departure Planning (3-6 Months Before Moving)

Consider an Intermediate Move to Strengthen Your Case: Many people benefit from relocating to a tax-free state (like Nevada, Texas, or Florida) before making their final move abroad. This creates a clear, documented break with California and can significantly simplify your residency documentation later.

Time Your Departure for Maximum Tax Benefit:

• Plan around when you’ll recognize income (salary, bonuses, stock option exercises)
• Consider the timing of any deferred compensation that might be considered California-sourced
• Strategically time any California real estate sales
• Coordinate with your annual tax planning to minimize the overall impact

Start Building Your Documentation Case: Begin keeping detailed records of your departure preparations. This documentation becomes invaluable if you’re ever audited. Create a file system to track everything we’ll discuss in the following phases.

Phase 2: Executing Your Physical Move (During Your Transition)

Establish Your New Principal Residence Clearly:

• Make sure your new home is unquestionably your primary residence
• If moving abroad, establish clear legal residence in your new country through official channels
• Strongly consider selling your California home entirely (keeping it as a second home significantly increases your audit risk and weakens your case)

Update Every Official Record (This Is Non-Negotiable):

• Change your driver’s license and vehicle registration to your new location immediately
• Update your voter registration and actually vote in your new location
• Change the address on all financial accounts, credit cards, and insurance policies
• Redirect all mail and close any California PO boxes

Relocate Your Professional and Personal Relationships:

• Establish relationships with new doctors, dentists, and medical specialists in your new location
• Find local attorneys and accountants (this is particularly important for high-net-worth individuals)
• Transfer any professional licenses or certifications to your new jurisdiction
• Join local professional organizations related to your work

Phase 3: Maintaining Non-Resident Status (Ongoing)

Strictly Limit Your California Time:

• Stay well under 45 days per year in California (many of our successful clients stay under 30 days to be extra safe)
• Keep detailed, contemporaneous records of every day you spend in California and elsewhere
• Be especially careful about extended visits during holidays or family events
• Consider tracking your time with apps or detailed calendars that create electronic records

Actively Build Your New Life:

• Join clubs, organizations, and community groups in your new location
• Establish strong local business and social connections
• Create a comprehensive paper trail of your active life in your new location
• Take photos and keep records of your participation in local activities

Handle California-Sourced Income Properly:

• Understand exactly what income California can still tax and plan accordingly
• File Form 540NR (non-resident return) accurately and on time for any California-sourced income
• Be prepared for the 7% withholding requirement on certain California payments over $1,500
• Keep detailed records of all California-sourced income and associated taxes paid

Special Strategies for Expats: Maximizing Your International Move

If you’re moving from California to another country, you have additional opportunities to optimize your tax situation. Here’s how to make the most of your international status:

Federal Expat Tax Benefits You Can Leverage

Foreign Earned Income Exclusion (FEIE):

• Excludes up to $130,000 of foreign-earned income from federal taxes in 2025
• Critical caveat: California doesn’t recognize this exclusion—if they still consider you a resident, they’ll tax the income you excluded federally
• This makes establishing clear California non-residency even more important for expats

Foreign Tax Credit—Your Double Taxation Protection:

• Use taxes paid to your new country to offset U.S. tax obligations
• Can be particularly valuable for reducing California taxes on any remaining California-sourced income
• Proper planning can eliminate most double taxation scenarios

Foreign Housing Exclusion—Additional Savings:

• Provides additional exclusions for qualifying housing expenses abroad
• Like FEIE, this only helps with federal taxes—California will still tax you if they consider you a resident

Building a Strong Foreign Tax Residence Case

Document Your Foreign Life Comprehensively:

• Obtain official legal residence status in your new country through proper immigration channels
• Open local bank accounts and conduct your financial life locally
• Join local organizations, clubs, and professional associations
• Keep detailed records of your foreign residence activities, social connections, and community involvement

Employment and Business Considerations:

• If working remotely for a California employer, carefully structure the arrangement to minimize California tax exposure
• Understand how different types of work could be considered “performed in California”
• Plan strategically around equity compensation, stock options, and other complex arrangements
• Consider whether establishing a foreign business entity makes sense for your situation

Advanced Coordination Strategies for Optimal Results

Strategic Asset Location Planning:

• Consider moving investment accounts and brokerage relationships out of California before you move
• Understand how different types of income will be treated by California, the federal government, and your new country
• Plan proactively for potential double taxation scenarios and how to minimize them

Timing Your Transition for Maximum Benefit:

• Coordinate your departure date with income recognition timing to minimize California tax exposure
• Consider the optimal timing of any large asset sales or business transactions
• Plan around deferred compensation, vesting schedules, and other complex arrangements
• Work with professionals to model different scenarios and choose the most tax-efficient approach

High-Net-Worth Planning: When You Need Advanced Strategies

If your net worth approaches the levels that would have been subject to the proposed exit tax ($30 million+), your planning needs to be more sophisticated. Here’s what successful high-net-worth departures typically involve:

Advanced Planning Priorities for Substantial Assets

Trust and Entity Structures for Protection and Efficiency:

• Evaluate whether trust structures can provide asset protection and tax efficiency
• Consider restructuring any California entities before you move to minimize ongoing California connections
• Plan strategically for the ongoing management of any California business interests you can’t completely eliminate
• Work with specialists who understand both domestic and international structures

Comprehensive International Tax Optimization:

• Coordinate your planning across multiple tax jurisdictions to minimize your overall tax burden
• Explore treaty benefits with your new country of residence
• Plan for potential future changes in tax law that could affect your structure
• Consider the tax implications in multiple countries, not just California and the U.S.

Enhanced Documentation and Compliance Systems:

• Maintain detailed records of your net worth, asset locations, and international structures
• Document every aspect of your departure and establishment of new residence
• Keep comprehensive records of time spent in different locations with electronic backup
• Implement systems for ongoing compliance in multiple jurisdictions

Future-Proofing Your Wealth Against Policy Changes

Monitor and Plan for Legislative Developments:

• Stay informed about wealth tax proposals that may resurface in California
• Understand how federal tax law changes could affect your international planning
• Keep track of evolving international tax agreements and reporting requirements
• Build flexibility into your structures to adapt to potential law changes

Maintain Strategic Flexibility:

• Structure your affairs to adapt quickly to potential law changes
• Keep options open for further relocations if tax policies become unfavorable
• Regularly review and update your tax strategy with qualified professionals
• Build relationships with advisors in multiple jurisdictions

Understanding California’s Withholding Rules: What Affects Your Cash Flow

California has specific withholding requirements that can significantly impact your cash flow as a non-resident. Understanding these rules helps you plan better and avoid surprises.

The 7% Withholding Rule You Need to Know

If you’re receiving California-sourced income as a non-resident, withholding agents (such as property managers, partnerships, or businesses paying you) must withhold 7% for California taxes on payments over $1,500 per year.

This automatic withholding applies to:

• Rental income from California properties
• Partnership or LLC distributions from California entities
• Certain business payments for services
• Other categories of California-sourced income

Why this matters for your planning: This withholding happens whether you owe the tax or not, so it affects your cash flow throughout the year.

How to Manage Withholding Strategically

Requesting Withholding Waivers: You can request a waiver from the FTB, but there are important requirements:

• The withholding agent must receive official approval before they can stop withholding
• You still need to file a California non-resident return (Form 540NR) regardless
• You’ll get credit for any amounts withheld when you file your annual return

Planning Around Withholding for Better Cash Flow:

• Budget for the cash flow impact of automatic withholding on large payments
• Consider the timing of major California-sourced transactions
• Understand that withholding doesn’t eliminate your annual filing obligation
• Work with your California withholding agents to ensure they understand the requirements

Your Personal Action Plan: What to Do Right Now

Whether you’re already committed to leaving California or just exploring your options, here’s your step-by-step roadmap to success:

Immediate Assessment

Evaluate Your Current Tax Status:

• Determine definitively whether California currently considers you a resident for tax purposes
• Identify all sources of California-sourced income you currently have or expect to have
• Review comprehensively your current ties to California (residence, business interests, family connections)
• Calculate your potential tax savings from establishing non-residency

Gather Your Critical Information:

• Collect documentation of your current residence, activities, and financial connections
• Review your investment and business structures for California connections
• Identify any deferred compensation, stock options, or other complex California arrangements
• Assess your audit risk based on your income level and California connections

Strategic Planning Phase

Get Professional Guidance Tailored to Your Situation:

• Consult with qualified professionals who specialize in California residency issues and international tax planning
• If you have significant assets, get comprehensive advice on optimal structure and timing
• Understand your specific risks, opportunities, and the potential tax impact of different strategies
• Develop a customized timeline for your departure planning

Begin Building Your Documentation Foundation:

• Start keeping detailed, contemporaneous records of your time in different locations
• Document your residence, activities, and connections systematically
• Create organized systems for ongoing compliance and record-keeping
• Begin the process of reducing your California ties strategically

Implementation Phase

Execute Your Departure Plan Systematically:

• If you’re moving, implement your plan thoroughly and document every step comprehensively
• Establish your new residence completely and build strong local connections
• Sever California ties systematically according to your strategic plan
• Coordinate the timing of your move with income recognition and other tax planning opportunities

Establish Your Ongoing Compliance Systems:

• File appropriate tax returns (resident or non-resident as applicable) accurately and on time
• Maintain comprehensive documentation systems for future reference
• Monitor regularly for legal and regulatory changes that might affect your situation
• Build relationships with qualified advisors for ongoing support and guidance

The Bottom Line: Your Path to Financial Freedom from California Taxes

The absence of a California exit tax is excellent news for your departure planning, but it doesn’t eliminate the need for careful strategy and systematic execution. The real challenge you face isn’t paying to leave—it’s proving you’ve left in a way that will satisfy California’s aggressive residency enforcement for years to come.

Focus your energy on what actually protects you:

• Properly establishing non-residency through comprehensive, documented actions
• Strategic timing of your departure around income recognition and major life events
• Understanding and properly managing ongoing obligations for any California-sourced income
• Coordinating your California departure with optimal federal and international tax planning

Don’t let these common mistakes derail your success:

• Worrying about non-existent exit taxes instead of focusing on real requirements
• Planning around failed legislative proposals instead of current law
• Ignoring actual residency requirements because there’s no exit tax to trigger action
• Assuming that physical departure automatically equals legal non-residency

The key to your success: Thorough planning, careful execution, and ongoing compliance with the rules that actually exist. With proper planning and professional guidance, you can cleanly separate from California’s tax system and avoid the ongoing worldwide income taxation that would cost you far more than any one-time exit tax ever could.

Your next step: Whether your situation is straightforward or complex, the most important action you can take is to start with a clear understanding of your current status and develop a realistic, comprehensive plan for where you want to be. Don’t let confusion about non-existent exit taxes delay your planning for the very real opportunities and significant financial benefits of properly leaving California’s tax system.

At Greenback, we’ve helped hundreds of clients successfully navigate California departure planning while optimizing their international tax situations. We understand the complexities you’re facing, and we’re here to guide you through every step of the process.

Ready to take control of your tax future? Contact us today to discuss your specific situation and learn how we can help you achieve the financial freedom that comes with proper tax planning and compliance.

This article is for informational purposes only and should not be considered tax advice. Tax laws are complex and subject to change. Always consult with a qualified tax professional regarding your specific situation.