California Cross-Border Tax Planning Lawyer

California Cross-Border Tax Practice California Nonresident Tax Planning

The key to remaining a California nonresident while living part-time in California is tax planning that involves three distinct disciplines: (1) cross-border “lifestyle” planning that allows you to defend your non-residency status, if questioned (our cross-border tax planning lawyer acquaints our clients with over 40 cross-border “lifestyle” factors that should be considered in such planning); (2) understanding how the FTB collects information about you, staying “below the radar” and avoiding the gratuitous disclosure of sensitive personal and financial information to the FTB; and (3) if needed, re-structuring the manner in which certain income is earned, assets are held and expenses are incurred to limit the amount of tax California can assess, whether your nonresident status is upheld, or you are determined to have become a California tax resident.

FTB Form 4600 Tax Return Requests and Residence Inquiries

The California Franchise Tax Board (“FTB) has a reputation for aggressively seeking out nonresidents who spend a significant part of the winter season (October – April) or more, in California. Their focus is to determine whether you would make a “vulnerable” candidate for a California residence tax audit. They do so by asking you to complete their questionnaire (not recommended) to learn enough about you to determine whether they think you should have filed a nonresident tax return, a part-year resident return or a resident income tax return. As the saying goes . . . “anything you say (in response to their inquiry and questionnaire) may be used against you.” We have years of experience in answering these inquiries professionally and a strong track record of dissuading the FTB from pursuing them into a full-scope residence tax audit (discussed immediately below).

California Residence Tax Audits

If the FTB is dissatisfied with your response to their residence inquiry and tax return request, and they continue to demand additional information and documentation from you, that may be the beginning of a residence tax audit. Such an audit can be extremely intrusive, time-consuming and document intensive – you can expect to be asked for all manner of information and documents that may indicate your whereabouts on each day of the tax year in question and for comprehensive documentation of your finances, including federal and other state or country tax returns and supporting documentation. We will guide you through every step of this process, prepare professionally-crafted responses to FTB information and document requests, assist you to prepare evidence supporting your status as a nonresident and otherwise assist you to proactively prepare a winning defense.

Tax-Efficient Structuring (or Restructuring) of California Vacation Home Ownership

Although owning a California vacation home is not determinative of your status as a California income tax resident, sooner or later, your individual ownership of a California vacation home is likely put a significant amount of your sensitive personal financial information in the hands of the FTB gratuitously. Our tax-efficient cross-border vacation home ownership structures allow you to avoid making such “gratuitous” disclosures, as well as other potentially disadvantageous tax effects of individual home ownership, which include high California individual income tax rates and imposition of nonresident withholding taxes on sale. Our vacation home ownership structures also avoid probate at the first and second death for married couples, which joint tenancy title does not. If you already own a California vacation home in your individuals name(s), we can help you with a “quiet” restructuring, which will avoid the need to file a tax return, the imposition of withholding taxes or the disclosure of other sensitive personal financial information.

Nonresident Investors in California Rental Property

The considerations described above under the heading “Tax-Efficient Structuring of (or Restructuring) of California Vacation Home Ownership” are magnified several times for nonresident individual investors in California rental property, whether such property is residential rental, commercial, industrial, ranch or agricultural property. Even a dollar of California source gross rental income requires the filing of a California income tax return each year that rent is received (even if no tax is due), with attendant annual disclosures of your sensitive personal information to the Franchise Tax Board. In contrast, our tax-efficient rental property structures for nonresident investment in rental property can help you to avoid: (i) filing nonresident individual income tax returns each year; (ii) making related disclosures of your sensitive personal information to the FTB; (iii) withholding of tax at the time of sale; and (iv) putting the home through a lengthy California probate should one of the individual investors die while on title. They may also significantly reduce your “effective” tax rate on future gains for both Federal and California income tax purposes. If you already own a California rental property in your individuals name(s), we can help you with a “quiet” restructuring, which will avoid the need to file a tax return, the imposition of withholding taxes or the disclosure of other sensitive personal financial information.

Nonresident Investors in Entities Doing Business in California

The FTB tracks and taxes to nonresident individual owners of “flow-thru” entities the business profits of those entities that are allocated or apportioned to or sourced in California. (A “flow-thru” entity includes a partnership, S corporation, certain limited liability companies and trusts, whether organized and operated from within or outside California.) Being a nonresident investor in such an entity, no matter how small your percentage ownership interest, can result in having to file a nonresident California income tax return each year, with attendant disclosure of sensitive personal information to the FTB. We assist our nonresident investor clients to avoid annual individual tax return filings to report such income and can help structure or re-structure business operations to significantly reduce individual California nonresident income taxation.

California Tax Planning for “Nomadic” Lifestyles

The ability to work, supervise others, invest and bank electronically, along with texting, email and video conferencing, have made it possible for many individuals to live a nomadic lifestyle, without having a traditional home base or domicile. Whether you are a retired investor traveling by RV, manage your business from your boat at ports along the West Coast or are a new Bitcoin millionaire traveling by private jet between island jurisdictions, such modern-day “nomads” can be particularly vulnerable to California residence-based taxation. Indeed, residence-based taxation may result from a seasonal visit that would not expose a non-nomadic visitor to such taxation. If you live a modern-day “nomadic” lifestyle and spend part of each year in California, we have considerable experience helping people with lifestyles like yours to minimize their exposure to California residence-based taxation.

California Tax Planning for “Mixed-Residence” Couples

In our practice, we encounter many “mixed-residence” couples. Few of them are aware that, if the California spouse is earning income in California from employment or operating a business generating California source income, such income may be characterized as “community property” income under California law and be attributed one-half to the non-earning, non-resident spouse. Such attributed income will give rise to a California income tax return filing obligation for the nonresident spouse (and also a U.S. income tax return filing obligation for my Canadian and other foreign nonresident clients, as well). Having to file a California nonresident tax return can also lead to a host of disclosures to the FTB that could themselves lead to a California residence audit of the “nonresident” spouse, if the nonresident spouse spends significant time in California. We assist our “mixed-residence” couples to cut-off California’s right to tax the non-resident spouse on a part of the resident spouse’s earnings, prevent tax-return filing obligations from arising for the nonresident spouse and defend any ensuing inquiry concerning the “nonresident” spouse’s California residence status.

California Pre-Residence Tax Planning

“Pre-residence” California tax planning is extremely important for individuals moving to California. It can be even more so for Canadian and other non-US citizens due to differences between California’s tax system and that applying in their former foreign country of residence. Some “pre-residence” tax planning must be implemented prior to arrival, including planning to address the problem posed by arriving with investments having unrealized gains and a low, income tax basis (as determined for California purposes). Other “pre-residence” planning, although potentially time-sensitive, can be implemented after arrival, for example, at the time when restricted, share-based compensation is granted. We regularly guide new residents through planning designed to mitigate the tax consequences of these tax law differences and exploit the disharmonies between California tax law and the tax law of other states or countries, where they exist.

Tax Planning for Departures From California, Including Changes of Domicile and/or Tax Residence

Significant “departure” tax planning opportunities exist for California residents who wish to change their residence or domicile to another destination and abandon California residence or domicile. The keys to such opportunity are making the change “tax effective” and effectively managing the date when the change becomes “tax effective.” For departures not expected to be permanent (e.g., other state or overseas work assignments), a change of tax residence is possible, even if a change of tax domicile is not.

In cases of permanent departures, California “departure” tax planning can eliminate California tax on gains on both movable tangible personal property (e.g., artwork or valuable collections), as well intangible personal property (e.g., shares of companies, cryptocurrency or other intangible capital assets). For U.S. citizens moving to other states, there are also options for avoiding tax on California real property, as well. Finally, for Canadian expats moving back to Canada after completing a job assignment in California or moving home to be closer to family, California “departure” tax planning can even potentially accomplish the “trifecta” of “departure” tax planning - avoidance of California income tax, US income tax and Canadian capital gains tax on appreciation in movable tangible personal property and intangible personal property arising while the owner was a resident of California.

California Income Tax Audits and Appeals

Our cross-border tax planning efforts on behalf of our nonresident clients are designed to keep them out of trouble with the California Franchise Tax Board (“FTB”) and are almost always effective at doing so, if our recommendations are followed. However, we often have nonresidents engage us who have not had the benefit of our cross-border tax planning assistance before becoming the subject of a Form 4600 inquiry letter or becoming embroiled in a tax dispute with the FTB over their residency status or other California tax issues. In these cases, we put our decades of experience handling California cross-border tax issues to work in California residency tax audits, as well as other types of tax audits. We also represent clients to settle or appeal post-audit California tax assessments.

US Cross-Border and International Tax Practice Planning to Avoid US Income Tax Residence

We have decades of experience assisting our non-citizen clients to avoid US income tax residence (and resulting US taxation of their worldwide income). In this regard, we assist our clients with “substantial presence” test calculations, “Closer Connection” Statement filings and evaluation of whether they qualify for special exemptions from counting certain days of presence in applying the “substantial presence” test formula (e.g., due to medical conditions, Pandemic-related travel restrictions or in commuting to US employment or self-employment from Canada or Mexico). We also have decades of experience working with “dual” residents who are “Treaty Nonresidents,” interpreting tax treaties and determining whether and the extent to which you qualify for treaty protection from US income tax.

Nonresident Tax Planning for Cross-Border Investments

Nonresident tax planning for international cross-border investments is a multi-dimensional process involving coordinating US income tax law (as well as state income tax provisions) with the tax law of the investor’s home country (and possibly that of third countries where holding companies or trusts may be located). For investments in US real estate, we incorporate FIRPTA withholding tax avoidance and recovery, structuring financing, as well as planning to reduce US taxes on rental income into the analysis. The scope of our planning experience extends to planning for all other categories of investment in US assets, as well. We integrate US withholding tax planning on cross-border cash flows to avoid or reduce the possibility of international double taxation and, for our individual clients, minimizing or avoiding US transfer taxes and California probate.

Nonresident Tax Planning for Cross-Border Business Operations

Structuring nonresident investment in cross-border business operations in the US requires the same coordinated planning under both the US tax system and the tax system of the investor’s home country, as well as tax treaty planning in some cases. We provide assistance with US entity-selection and organization, structuring financing (including optimizing the mix of debt and equity), drafting intercompany and third-party agreements to make the structure operational, explaining joint venture considerations, incorporating immigration considerations and advising on US transfer tax avoidance. We also integrate US withholding tax planning for cross-border cash flows and international double taxation avoidance into our advice. We can likewise assist nonresident investors in US businesses with US information reporting obligations and planning for sale of the business, taking it public or other possible “exit” scenarios.

Pre-Residence US Tax Planning

Individuals who are planning to become US residents need a “pre-residence” tax plan. Pre-residence tax plans are especially important for those for whom US income tax residence will begin immediately upon entrance after being issued a US lawful permanent residence visa. For our Canadian expat clients and other non-US citizens, pre-residence tax planning is a “must” due to significant differences between the US and Canadian tax systems, or other foreign tax systems. To be effective, some elements of your pre-residence tax plan must be implemented prior to arrival (i.e., prior to the first day of U.S. residence). Other “pre-residence” tax planning, although potentially time-sensitive, can be implemented after arrival, for example, at the time when restricted, share-based compensation is granted by an employer. Similar considerations apply for California “pre-residence” tax planning. We also find that the best time to engage in “departure” tax planning is when preparing a pre-residence tax plan.

“Dual Resident” Tax Planning

Individuals who exceed 183 days of US presence in any tax year may become an income tax resident under US internal law for that tax year, in addition to being a tax resident of their “home country.” For our Canadian, United Kingdom and Mexican tax clients (as well as residents of other countries who share an income tax treaty with the US), “dual residence tie-breaker” rules in such tax treaties will determine, as between your home country and the U.S, which country has the right to tax your worldwide income. If, under those rules, you are found to be a “Treaty Nonresident,” income you earn outside the U.S. will usually not be subject to U.S. income tax, despite the fact that you have become an income tax resident under U.S. internal law. Notwithstanding your possible status as a Treaty Nonresident, however, the IRS and US Treasury still take the position that “dual” residents still have US information reporting obligations. If you are a “dual” resident, we can guide you through these, as well as other special tax filing requirements and related cross-border tax planning.

“Dual Citizenship” Tax Planning

Unlike virtually all other developed countries, the US taxes its citizens on their worldwide income (with a few exceptions), without regard for their place of residence. We offer foreign citizens who are thinking of becoming “dual” citizens an analysis of the US tax implications of taking US citizenship, in their specific factual circumstances. There are potentially several dozen important US tax implications of taking US citizenship, many of which remain unknown to new citizens until they are bitten by them. We encourage prospective US citizens having cross-border business and investment interests abroad to learn about and plan for the myriad worldwide tax consequences of US citizenship before taking the oath. For those who are already “dual” citizens, we provide comprehensive cross-border tax planning, including planning addressing the US income tax and reporting implications of having ownership interests in non-US businesses, investments or trusts. That planning includes comprehensive US estate, gift and other transfer tax planning for worldwide assets.

Expatriation Tax Planning for US Citizens

A special “expatriation” tax regime exists to deter “wealthy” U.S. citizens from relinquishing their citizenship in order to avoid future U.S. taxes. Under this tax regime, so-called “covered expatriates” are treated for U.S. income tax purposes as having sold all property in which they are considered to own an interest the day before expatriation and may be subjected to other income accelerating events and withholding taxes. In addition, a special transfer tax system follows an expatriate for the rest of their lives to tax any U.S. persons receiving gifts or bequests of foreign (e.g., Canadian) situs property from them. We advise US citizens concerning tax planning for the relinquishment of US citizenship, including planning to avoid “covered expatriate” status. In our experience, the most effective expatriation tax planning occurs when a cross-border tax planning attorney is consulted long before the date you wish to relinquish your citizenship.

Departure Tax Planning for Relinquishment of “Green Cards”

“Long-Term Residents” can also become subject to the “expatriation” tax regime that applies to abandonment of U.S. citizenship, when they formally relinquish their green card. As discussed above, application of the “expatriation” tax regime on the relinquishment of your green card can have painful tax repercussions for those who do not plan to avoid it. A “long-term resident” is any non-US citizen who held a green card at any time in eight or more of the last 15 tax years before relinquishing their green card. Under that definition, it is possible to become a “long-term resident” by spending as few as 6 years and two days as a lawful permanent resident (ask us how). We advise potential “long term residents” how to avoid “covered expatriate” status. We also advise green card holders who failed to formally relinquish those visas concerning the implications of late abandonment (the IRS position is that you are still a US income tax resident)!

Relocating to Puerto Rico to Slash Taxes Without Relinquishing Your US Citizenship or Greencard

Many US citizens and green card holders wish to cease paying US income taxes on their investment and business income, but stop short at the idea of giving up their US citizenship or green card to accomplish that. For those, a properly planned relocation of their home and business to Puerto Rico could slash their tax rates (to zero on certain investment income and to 4% on certain business income), yet allow them to remain US citizens or lawful permanent residents and spend significant time in the U.S. each year. Operating a global service business from Puerto Rico can also avoid Subpart F, PFIC and GILTI classification of foreign income to achieve permanent deferral from US tax, with proper planning. We advise our clients on the development of a Puerto Rico relocation plan, qualification as "bona fide residents" of Puerto Rico for US tax purposes, structuring investments and business operations to generate exempt Puerto Rico source income and on effectively relinquishing California tax residence and domicile to cut-off future California taxation of Puerto Rico source income."

Delinquent FBAR Reports and Other Foreign Asset and Information Reporting

US citizens and tax residents (including all “dual” resident taxpayers) are subject to numerous US information reporting obligations in relation to interests in foreign financial assets or trusts, as well as interests in, directorships or officerships in, or transactions with, non-US companies. For those who didn’t have the advice they needed when becoming US residents or citizens, we have experience getting the IRS to waive or reduce delinquent filing penalties if you qualify to enter an IRS tax compliance program. Those programs potentially allow for penalty-free, back-filing of required information reports in cases of non-willful failure to file. It is especially important to have an experienced Cross-Border Tax Attorney assist you with getting back into compliance because attorneys in the US have a right to keep your confidential disclosures from the IRS in tax matters where criminal charges are possible, which your CPA and CA do not. They are also trained to recognize and properly manage situations in which you may be vulnerable to criminal tax allegations.

US Estate Tax, Gift Tax and Other Transfer Tax Planning

The US imposes transfer taxes on the value of gifts made by and estates left by, nonresidents, transfer tax residents and citizens of the US. Those transfer taxes are in addition to US income and capital gains taxes! The present tax rate applying to the value of gifts and estates in excess of the applicable exemption amount is 40%, but may soon be raised. A further “generation-skipping transfer” tax may also be imposed (again, at a 40% tax rate), in addition to any US gift or estate tax, on the value of certain transfers that are considered to “skip” one or more generations. Finally, some former US citizens and green card holders may be subjected to a special inheritance tax regime. Under that regime, the value of transfers by such persons to US beneficiaries of property located outside the US (which would no longer be subject to US gift or estate tax), may be subject to US inheritance tax at a 40% tax rate. We have decades of experience assisting clients to avoid or minimize US transfer taxes in structuring their US investments and in planning for asset transfers as part of our cross-border estate planning practice.

Federal Income Tax Audits and Appeals

Our cross-border tax planning efforts on behalf of our clients are designed to keep them out of trouble with the Internal Revenue Service (“IRS”) and are almost always effective at doing so, if our recommendations are followed. However, we often have clients engage us who have not had the benefit of our cross-border tax planning assistance before becoming the subject of an IRS tax audit over their residency status or other US tax issues. In these cases, we put our decades of experience defending them in such an audit. We also represent clients to appeal unjustified IRS tax assessments resulting from an audit.

Retain an Experienced Cross-Border Tax Attorney

We have decades of experience handling all cross-border tax planning and tax controversy issues. We serve locations all over California, including the desert communities of Palm Springs, Palm Desert, Rancho Mirage, La Quinta, Cathedral City and Indio. We welcome inquiries you may have concerning your specific situation. Feel free to call us at (760) 578-5093, contact us via email at Brent@LanceCrossborder.com or by using our online contact form. We will respond to all relevant inquiries without any obligation.