Everyone – Including Foreigners… Stay Away from California! 10-Year Wealth Tax Looms for Single Year Stays Over 60 Days

Why should I blog about a possible wealth tax in California? After all, my US tax blog focusses on international tax matters, US persons abroad, and foreign families with any US connections.  Well, for starters, many of my clients are foreign nationals who (prior to COVID-19) enjoy visiting the US, or have specialized medical treatment there or send their children to a US university.  They are also wealthy and have net worth’s that will be hit by the proposed California wealth tax.  More than that, I believe California is leading a wave for the future. Wealthy foreign individuals must now carefully look at what’s in store for them if they go to the US for even a relatively short time frame in a single calendar year. Understand what the particular state may extract from you in the future!

Now is a good time to remind foreign persons that State tax issues aside, the US federal tax system is highly complicated. Breathing too much American air can result in US tax consequences. Think I am kidding?  I’m not.  (And, as you will see, breathing too much California air in particular, will affect the wealth of your family for at least a decade).

Foreign nationals are often unsure if they have any US federal tax issues to be concerned about under one or more of the three major US tax regimes:  Income Tax, Gift Tax, Estate Tax.  You might want to review your various US “connections” – a helpful guideline/questionnaire is here.  The questionnaire helps to identify major areas of US tax risk.  Follow-up with a US tax professional should be undertaken once an area of risk is identified. I am here to help you, just send me an email if you would like to arrange a consultation.

Overview of California’s Proposed Wealth Tax

California’s Legislature is contemplating a wealth tax on ANY person who spends more than 60 days within the State in a single year. Assembly Bill 2088 will assess a wealth tax annually for a 10-year shadow period and extend to residents, part-year residents, foreigners – in short, every individual who is in the state for over 60 days in a calendar year.  Even those who move out of California to another state, or foreigners who return to their home country, say, after extended medical care in Cedars Sinai Hospital or attendance at UCLA, would continue to be subject to the wealth tax for a decade.  The law makes no distinction between a nonresident from North Dakota or a nonresident from Dubai.

The proposed legislation  sets the annual wealth tax at 0.4% on world-wide net worth over US$30 million.  To be clear, this annual tax would be based on one’s current world-wide net worth. This means, for example, that if you inherit $5 million dollars within the 10-year shadow period, this amount will also be subject to the wealth tax. The percentage of net worth taxed would decline each year during the 10-year shadow period if the individual leaves California.

The 0.4% tax rate appears nominal and the $30 million base high, but the entire notion that someone can be taxed for a 10-year period once he or she has spent over 60 days in-state is simply preposterous (let alone likely unconstitutional).  If enacted, California will be the first US state to have created a wealth tax.  Creativity is called for as California is facing a big budget deficit because of the health and economic crisis brought on by the coronavirus. More information at the Wall Street Journal Op Ed (December 18, 2020).  My colleague John Richardson has a podcast interviewing the author of the WSJ article. You can listen here.

Don’t Get Caught Out

Many other states are in the same economic boat as California and this proposed law sets in place a very slippery slope. Other cash-strapped states may think about enacting copycat laws.  In fact, it was reported that New York was considering a wealth tax (referred to as the “Billionaire’s Tax”) on NY residents but Governor Cuomo nixed the idea due to his valid concerns that it would lead to an exodus of high net worth individuals from the state. The “Billionaire’s Tax” would be imposed annually and would be based upon the year-to-year net increase in the fair market value (the unrealized gain) of the assets of a wealthy resident.  At least New York limited its proposed law to NY residents. California – not so!

Head’s up and keep your eye on the ball.

Posted January 7, 2021

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