California is moving to tighten its tax regime for high‑net‑worth residents. A new proposal, Assembly Bill 71, would extend the state’s existing income‑tax burden, introduce a modest wealth tax, and apply a ten‑year retroactive look‑back to anyone who spends 60 days or more in California in a given year.
What Assembly Bill 71 seeks to change
- Residency trigger: Spending 60 days or more in California during a calendar year could subject a person to the state’s wealth‑tax rules and a ten‑year look‑back period.
- Income‑tax rate increase: The top marginal state income tax, already the highest in the nation at 13.3 %, could rise into the 16 % range.
- Capital‑gains treatment: The bill proposes to broaden the base of taxable capital gains and to eliminate the stepped‑up basis for inherited assets, meaning heirs would owe tax on the full appreciation of the inherited property.
- Corporate tax: Progressive corporate tax rates would be raised, adding to the overall tax burden on businesses operating in the state.
- Wealth tax: A new annual tax on net wealth is being revived. The original draft called for a rate of roughly 40 basis points (0.4 % of total wealth) per year.
Retroactive application
The legislation would look back up to ten years, potentially taxing individuals who have already left California. The retroactive provision applies not only to former residents but also to anyone who merely visited the state for the requisite 60 days in any of those years.
Potential impact on high‑net‑worth individuals
- Higher overall tax liability: Combining a higher income‑tax rate, expanded capital‑gains tax, loss of stepped‑up basis, and a wealth tax could push the effective state tax rate well above 20 % for some taxpayers.
- Asset‑valuation challenges: Wealth taxes require annual valuation of assets such as real estate, private‑company shares, and other illiquid holdings, which can be costly and complex.
- Planning uncertainty: The retroactive element creates risk for anyone who has spent significant time in California in the past decade, even if they have since relocated.
How the proposal compares with other jurisdictions
- Bahamas, Singapore, Ireland: These jurisdictions are frequently cited for their low or zero personal income‑tax rates, lack of capital‑gains taxes, and favorable treatment of foreign‑sourced wealth. For high‑net‑worth individuals, relocating to such jurisdictions can dramatically reduce tax exposure compared with California’s projected rates.
Practical steps for those potentially affected
- Track days spent in California – Maintain a precise record of any stays that approach the 60‑day threshold.
- Assess residency status – Review the definition of California residency under current law and the proposed changes; consult a tax professional to determine whether you qualify as a resident or non‑resident for tax purposes.
- Model tax scenarios – Run projections that incorporate the higher income‑tax rate, capital‑gains changes, and the 0.4 % wealth tax to understand the incremental cost over a ten‑year horizon.
- Consider relocation – If the projected tax burden is significant, evaluate moving to a lower‑tax jurisdiction. Factor in relocation costs, lifestyle preferences, and any exit‑tax rules that may apply in your current state of residence.
- Plan asset valuation – Prepare for annual wealth assessments by gathering up‑to‑date appraisals of real estate, business interests, and other assets that could be subject to the wealth tax.
Risks and caveats
- Legislative uncertainty: The bill is still in the drafting stage; specific rates, thresholds, and enforcement mechanisms could change before enactment.
- Federal interaction: Any state‑level wealth tax must coexist with federal tax law; potential conflicts could lead to legal challenges or adjustments.
- Compliance costs: Valuing and reporting wealth annually, as well as handling retroactive adjustments, may generate significant administrative expenses.
California’s proposed tax overhaul represents a substantial shift in how the state intends to capture revenue from its wealthiest residents and visitors. High‑net‑worth individuals should monitor the legislation closely, maintain detailed residency records, and seek professional advice to mitigate the financial impact of the potential changes.
