Plan your expenses and deductions strategically each year
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Maintain accurate and organized financial records for easy reporting
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Talk to a tax professional for expert guidance
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How High-Income Californians Can Avoid the Top 5 State Tax Traps
California’s tax laws are some of the most complex — and expensive — in the country.
For high-income earners, that means even small mistakes or missed opportunities can cost tens of thousands of dollarsevery year.
At PacificWestTax, we specialize in helping successful Californians keep more of what they earn — through structure, timing, and strategic planning.
1. The Residency Trap
California taxes worldwide income for anyone it considers a resident — even partial-year residents.
That means if you live or work in California for part of the year, the state may still claim your entire income.
How to avoid it:
- Establish a clear residency record if you plan to relocate.
- Track time spent in and out of state.
- Keep documentation of where you work, live, and vote.
- Consider domicile planning before major liquidity events.
Many clients moving to Nevada, Texas, or Florida fail this test because they didn’t plan before the move.
2. The Pass-Through Entity Tax (PTET) Confusion
California’s PTET election allows business owners to pay state income tax through their entities — creating a federal deduction workaround.
However, the rules are nuanced and filing deadlines strict.
How to avoid it:
- Elect PTET before the annual cutoff date.
- Ensure your entity and income qualify.
- Coordinate with your CPA on estimated payment timing.
Done right, PTET can restore up to $30,000+ in lost federal deductions for high-income business owners.
3. The Capital Gains Timing Trap
Selling a business, property, or major investment? California taxes capital gains as ordinary income — with no lower rate like federal law provides.
For many high earners, that means an extra 13.3% state tax on top of federal.
How to avoid it:
- Time sales strategically across tax years.
- Consider 1031 exchanges, Opportunity Zones, or installment sales.
- Use trust and entity structures to shift timing or allocation.
With proactive planning, you can often defer or offset these taxes entirely.
4. The SALT Deduction Limitation
California’s high state taxes are compounded by federal limits on the State and Local Tax (SALT) deduction — capped at just $10,000 for individuals.
High-income taxpayers feel this limit more than anyone.
How to avoid it:
- Use entity-level PTET elections to bypass SALT caps.
- Shift certain income sources into deductible entities.
- Combine charitable gifting strategies with business planning for partial recovery.
Proper structuring can legally reclaim deductions many Californians assume are lost forever.
5. The Audit Exposure Trap
High-income Californians are among the IRS’s and Franchise Tax Board’s most audited taxpayers.
Triggers include:
- Large charitable or business deductions
- Multi-entity ownership
- Out-of-state income or residency claims
- Real estate depreciation mismatches
How to avoid it:
- Maintain strong documentation and separate accounts.
- Have your returns reviewed annually for audit risk indicators.
- Coordinate federal and state filings to avoid inconsistencies.
The best audit strategy is simple: plan proactively, not reactively.
The PacificWestTax Approach
Our firm takes a comprehensive approach to California tax planning for high-income individuals:
- Residency and multi-state income planning
- Entity optimization (S-Corps, LLCs, and family offices)
- Investment, equity, and exit tax modeling
- Audit defense and FTB coordination
We don’t just prepare returns — we design tax systems that keep you compliant and efficient year after year.
Key Takeaways
- California’s top earners face the highest combined tax burden in the U.S.
- Residency rules, PTET elections, and capital gain timing can make or break savings.
- High-income professionals need integrated planning — federal, state, and entity.
- A strategic CPA can reduce taxes without adding risk.