California Differences - Foreign Income Exclusion
California does not have an equivalent to the Federal foreign income exclusion provision. Residents of California are taxed on ALL income, including income from sources outside California; the key is whether or not the taxpayer is a resident.
A safe harbor is available for certain individuals leaving California under employment-related contracts. The safe harbor provides that an individual domiciled in California who is outside
California under an employment-related contract for at least 546 consecutive days (18 months) will be considered a non-resident unless:
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The individual has intangible income exceeding $200,000 in any taxable year during which the employment-related contract is in effect; or
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The principal purpose of the absence from California is to avoid personal income tax.
Caution
The safe harbor only applies to employment related income. Thus, other non-exempt CA source income would continue to be taxable to CA as a non-resident, except for CA source pension income, which is not taxable to CA when received by a non-resident (see chapter 4.01).
Additional Caution
Not only must the employment-related contract be for at least 546 days (18 months), but the individual who leaves California under such a contract will only qualify for protection under the safe harbor provision if he or she remains outside of California for at least 546 days. A taxpayer who had a 2-year (and renewable for longer) contract to work in Malaysia returned to California after 13 months. The Office of Tax Appeals agreed with the FTB that the individual was a California resident and didn’t qualify for the safe harbor. (Appeal of Mazer, 2020-OTA-263P
Spouse Issues
The spouse of the individual covered by this safe harbor rule will also be considered a non-resident while accompanying the individual outside California for at least 546 consecutive days. Return visits to California that in the aggregate do not exceed 45 days during any taxable year covered by the employment contract are considered temporary. However, if the spouse of the taxpayer who meets the safe harbor rule does not also meet the safe harbor rule (e.g., remains in California), then he or she would continue to be a California resident, and generally 50% of the taxpayer’s income would not meet the safe harbor and would be taxable to CA. FTB Pub 1031, page 4 includes examples of this situation filing both jointly and separately.
Individuals not covered by this safe harbor must determine their residency status based on their facts and circumstances. The determination of residency status cannot be solely based on an individual’s occupation, business, or vocation. Instead, all activities must be considered in the determination of residency status.
California Residents
Taxpayers, who by the facts and circumstances are determined to be California residents, may be able to deduct away-from-home business related travel expenses (for travel, meals, and lodging) on their California tax return while earning income in a foreign country.