We all love California’s coastline, sunny days, mild winters, and access to magnificent nature. Of course, pros are often balanced out with cons. Luckily, the cons we are referring to here are more like maneuverable hurdles and can be mitigated with the right planning. There is more than sunshine tax to take into account when planning out your financial strategies as a California resident and/or business owner. California has some of the highest sales, personal income, and corporate tax rates in the United States.
While California is wonderful in most ways, when looking at corporate tax rates, the phrase ‘best in the west’ goes out the window. California has the highest corporate income tax rate in the western U.S., the current rate coming in at 8.84%, and depending on the business type you own, you may have to pay a yearly franchise tax. You can read more about this on the California Taxpayers Association website: https://www.caltax.org/ and the State of California Franchise Tax Board website: https://www.ftb.ca.gov/.
Fortunately, there are several strategies to consider when looking to mitigate the detrimental tax rates in California and to keep the sun shining. To mention a few of them:
● Asset Protection
● Estate Planning
● Sheltering assets
● Taxing advantage of tax credits
There are various strategies that help to legally protect one’s assets, wealth, estate, and business entity(ies) from extensive tax liabilities. Some of these strategies include the creation of corporations, partnerships, and trusts and deciding how to structure them. Sheltering assets in another state is a common way to protect your current and future assets and wealth from California’s strict estate and transfer taxes. These types of advanced planning methods have several moving parts that may vary based on your needs, and it would be useful to talk to a financial advisor directly about it to determine which strategies would be a good fit for you.
According to Steve Oshins, a nationally known and respected estate planning attorney of Oshins & Associates, LLC in Las Vegas, Nevada, the Hybrid Domestic Asset Protection Trust (HDAPT) is an extremely useful technique here that addresses asset protection and estate planning, the implementation of which can help drastically reduce your estate and income tax liabilities. A hybrid DAPT is a third-party irrevocable trust set
up in the United States in which there is a trust protector, appointed by the settlor, who has the power to add and remove beneficiaries. There are currently several states that recognize DAPTs. You can read more about this powerful strategy in Oshin’s article: How the Hybrid Domestic Asset Protection Trust Has Changed the Entire Asset Protection Industry and in this article published by Denha & Associates, PLLC, which also highlights the hybrid DAPT as, quoting Steve Oshin, “the most important tool in the asset protection industry”: https://denhalaw.com/.
Once you maximize certain tax deductions as outlined by the IRS, another action that can be incredibly beneficial is to make sure you are taking advantage of tax credits. What are tax credits? Many people presume they are the same thing as tax deductions, however, they certainly differ in that credits refer to amounts that taxpayers can subtract from the total amount of taxes they owe rather than from their total taxable income. There are many criteria in place and rules around qualifying for different tax credits, so it is recommended to consult a tax professional to make the right moves. Tax credits fall into one of three buckets, refundable, partially refundable, or nonrefundable, which categorize the credits based on if they only subtract from an existing amount you owe or if the credit can result in a refund to you even if you don’t owe any taxes. Some of the more common tax credits include child and dependent care tax credits, electric vehicle and other energy efficiency tax credits, the child adoption tax credit, and opportunity zone funding tax credits. Other tax credit opportunities also worth researching, especially for business owners, are the Empowerment Tax Credit, AB 150 Salt Workaround, Work Opportunity Credit, Small Business Hiring Tax Credit–Senate Bill 1447, Senate Bill 408 ($10,000 credit), and the Employee Retention Credit. You can learn more about the various tax credit opportunities mentioned here and others in the credits and deductions section on the IRS website as well as the credits section on the State of California Franchise Tax Board website.
Talk to your CPA about the best options for you as you go about researching different strategies to help reduce your California tax liabilities. If you don’t have a financial advisor, this is the time to talk to one! The most effective way to protect your wealth and your business entity from the worst tax liabilities is to arm yourself with information so you can plan, prepare, strategize, and implement accordingly, and the best time to start planning is now. That way, you can rest assured that you are protecting your assets and wealth by balancing the scales so you can continue to freely enjoy that coveted ocean breeze and California sunshine.