In 2024, California increased its top income tax from 13.3% to 14.4%, largely due to the removal of the limit on the 1.1% employee payroll tax for State Disability Insurance. This rate applies to individuals earning over $1 million annually. However, the tax on capital gains remains at the previous rate of 13.3%, which, when combined with federal taxes, makes Californian residents one of the highest payers of capital gains tax worldwide.

Despite the increase, it is unlikely to motivate mass migrations out of the state. However, those planning significant financial events, such as company sales or large lawsuit settlements, may consider relocating to lower tax states before initiating these actions.

It’s important to note that movement out of California must be carefully planned to avoid a residency audit by the state’s Franchise Tax Board, which can be rigorous in its investigations of ex-Californian residents’ tax obligations. If located in California for more than nine months, individuals are considered residents, and even more than six months can lead to complications.

For those considering relocation, managing California obligations carefully is key. This could include the continuation of filing non-resident tax returns to disclose any California-sourced income, which notably protects from unlimited audit periods that the state imposes on those who fail to file an income tax return.