California and Taxes: How Can Expats Moving to Spain Break State Tax Residency?

By
Bruno Bianchi
-

Question

“Question related to state taxes in California. We just consulted with a very experienced and seasoned tax consultant that deal with Spain and US taxes, and he told us that we are liable for California state taxes when we file taxes in Spain next year. And that we would have to register in another state in the US, by December 31st, to avoid this.

What if you say you moved to another country?

I am wondering if any of you have dealt with this and how did you go about it?

We are not applying for visas. We are applying for residency (EU passport and tarjeta comunitaria). I appreciate any information you have regarding this.”

Answers

“For California, there is a publication FTB 1031 that has an example of a California resident who moved permanently to Spain. It might be helpful for your situation.”

“When you’re a tax resident in Spain, you can use the foreign Tax Credit to deduct the amount of the taxes you pay to Spain from your US Federal tax liability each year (often resulting in zero Federal tax owed). Some states (like Arizona for me) allow the Foreign Tax Credit to take the same deduction from state tax liability.

California and Taxes: How Can Expats Moving to Spain Break State Tax Residency?

California does not allow the Foreign Tax Credit. So, you would, indeed, need to become a resident either in a state that has no income tax, or that allows the use of the Foreign Tax Credit. You would want to check whether the state you choose has any restrictions on using the Foreign Tax Credit like a maximum credit taken each year, or requirements for living full time in the foreign country.

As an Arizona resident who lives full time in Spain, I have owed no US Federal or AZ state taxes for the three years I have lived in Spain so far.”

“California is ‘sticky’ and has no FTC credit. The key is to break all ties.”

“To be fair, it’s not just a California issue. 33 other states don’t allow the use of the Foreign Tax Credit. Your only options are Alabama, Arizona, Hawaii, Iowa, Montana, North Carolina, and Louisiana, and Indiana.

Alternatively, you have the states with no income tax, though you may have other taxes in those states (like higher property taxes, as an example, if you plan to maintain or rent out your home) that may still apply to you even if you are living in Spain (funds have to come from somewhere, right?): Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and, Wyoming.”

“CA and NY are the most aggressive states chasing their taxpayers when they leave. But if you sever ties with the state, you may stop being a CA tax resident. It is kind of a subjective test so two people can have different opinions.

Establishing residency in another state, preferably one without an income tax is a good idea. But it is not required by law to sever CA tax residency. Maybe he meant that for 2025, you will be a CA part year resident up until the date you leave, IDK.”

“In the matter of state residency, he is right in practice, it is better to, it is best practice. But the laws of no state requires that you establish residence in another US state to sever residence of that particular state.

They do have tests to see if you are or you are not a resident of their state. And establishing residency in another country is a big factor in leaving residency on that state, but if you have other things like substantial holdings in the state, maybe this is why he recommended to establish residency in another state, as a precautionary measure.”

“You’ll need to sever all ties with California including health insurance, voter registration, phone number, etc. Then register in another state. If you have friends in Florida or Texas that could be ideal. Otherwise, go to South Dakota.”

“Will you have income or investments (including property) in CA? I moved from SF and we were told to establish residency in another state but that turned out to be completely unnecessary.”

“We followed the law and when we moved, we severed ties to California. We declared our residence to be outside the U.S. and we have enough of a paper trail that we felt confident in not paying tax to California. We still have a couple of brokerage accounts there, but we are now bonafide tax residents of another country. So far, we haven’t had any push back.”

“I was just looking into state taxes today. I need to be a resident of a state for banking and other purposes. Our current tax liability in Michigan is low enough that I will maintain a MI address for all that banking, mail, etc. with the use of a mail forwarding service (about $300/yr). California is surely another story.

You may want to investigate a SD residency. There is an initial cost and travel expenses to set up your residency. Then there might be car registration and insurance depending on your situation and planned move. To me it sounds like a big hassle but for you it could be a cost savings.”

“CA is a ‘sticky’ state, i.e., they work hard to hold onto their residents tax income if they move out of the country. The safest way is to establish your residency in another US state first (preferably one with no state income tax).

South Dakota is great for this, they even have instructions on their state website. Stay overnight in a hotel, bring the receipt to the DMV, get a SD residency, you’re set. They’ve pretty much become a go-to for those living nomadic lifestyles (RVing around the US) and have leaned into it.”

“California’s Franchise Tax Board (FTB) doesn’t mess around—they’ll tax your worldwide income, including what you make in Spain, if they still see you as a resident. Unlike federal taxes, California doesn’t care about things like the Foreign Earned Income Exclusion, so you could end up paying taxes twice (in Spain and California) if you don’t play this smart.

They’ll check stuff like how much time you spend in California, where your family or stuff is, and whether you’ve got a driver’s license, voter registration, or bank accounts there. Your consultant’s on point about needing to cut ties or set up residency elsewhere by December 31, 2025, or California might tax everything you earn next year. Just saying you’ve moved to Spain won’t do the trick—they’ll assume you’re coming back unless you back it up with proof.”

“To get California off your back, you’ve got to prove you’re not a resident anymore. One solid move is to set up residency in a no-income-tax state like Texas, Nevada, or Florida before you head to Spain—California’s more likely to buy that you’ve left for another state than another country.

You’d need to get a driver’s license, register to vote, update your address with the IRS and banks, and maybe rent a place in that state, keeping things like leases or utility bills as evidence.

Another option is California’s “safe harbor” rule, where you’re a nonresident if you’re out of California for 546 straight days (about 18 months) for work, spend less than 45 days there each year, and have a home in Spain. This might not work if you’re not moving for a job, so we’d need to double-check.”

“Once you’re in Spain for over 183 days a year or your main financial life is there, you’ll likely be a Spanish tax resident, filing a resident return (Modelo 100) on all your income at rates from 19% to 47%.

The U.S.-Spain tax treaty lets you claim a credit on your federal taxes for what you pay in Spain, but California doesn’t follow that treaty, so breaking their residency grip is crucial.”

“I moved to Seattle, WA (Feb. 1), 6 months before I moved to Spain. Once in WA, I changed all my addresses, opened a local bank account, got a WA state DL/state plates for my car, a library card, registered to vote, and subscribed to a couple of magazines at my new address.

I applied for the NLV from my new WA state address. I filed state taxes for the 1 month (Jan.) I was in CA, and it worked.”

Conclusion

Spainguru community members agree that California is one of the most aggressive U.S. states when it comes to retaining tax residency, even after moving abroad. The key to avoiding ongoing California state taxes lies in severing all ties: cancel voter registration, driver’s licenses, bank accounts, and health insurance in the state.

Many recommend establishing residency in a no-income-tax state such as Florida, Texas, or South Dakota before the move.

While California does not recognize the Foreign Tax Credit, moving to a state that does—or one with no income tax, may help reduce or eliminate state tax liability.

Simply stating you’ve moved abroad is not sufficient; documentation and a clear paper trail are essential.

Filing as a part-year resident and ensuring tax residency is transferred before December 31 of the year prior to departure is also recommended for cleaner separation.

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