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Law makers are still debating a California Wealth Tax. The first iteration of a bill that would tax those with extreme wealth did not make it and a current second version increased all of the rates that apply to high wealth individuals.
As a Californian, you’re no stranger to high taxes already. In fact, California comes in at number one for the country’s highest income tax – 13.3 percent.1 And if you’re a high earner, you could be subject to an even bigger tax hit soon with the country’s first proposed wealth tax.
What Is a Wealth Tax?
With income tax, the individual is taxed on how much they made during the previous year in taxable income (such as a salary, retirement account withdrawals, interest, etc.).
Wealth tax, on the other hand, is an annual tax that is applied toward an individual’s actual net worth – as opposed to the income earned over that year.
Would California’s Wealth Tax Impact Everyone?
No, it would not. The newly proposed wealth tax would only impact those with over $50 million of net worth. The annual tax rate is proposed to be 1%, but jumps to 1.5% on new worth over $1 billion.
Naturally this additional tax would not impact most people, but for high wealth individuals or those wanting to get themselves into that bracket, you need to be aware that the legislation is still being debated and may come into effect.
How Is Net Worth Calculated?
Now that’s the million dollar question (no pun intended). Trying to determine the net worth of the ultra wealthy is not always something that can be easily calculated or defined. As of now, the tax would take into account all globally accumulated assets and liabilities held by an individual or couple. Many are predicting, however, that the state may run into trouble when it comes to determining the value of illiquid assets, as well as attempting to tax assets not held within the state of California.2
But Wait… Startup Entrepreneurs May Catch a Break
California – and the Bay Area in particular – has been the home of startup visionaries for years. From Mark Zuckerberg to Steve Jobs, Silicon Valley has become the breeding ground for successful startups.
While this wealth tax is meant to earn additional revenue for the state, lawmakers likely don’t want to alienate or discourage entrepreneurs from bringing their endeavors to the Golden State. In the proposed bill, taxpayers with entities such as startups or other hard-to-value assets may “elect for an unliquidated and deferred tax liability to be attached to those assets.”2
If an individual would choose to go this route, they’d need to sign a contract with the state of California determining when the value of these assets (such as a start-up) would become subject to the proposed wealth tax.
Thinking of Leaving the State? Consider This First
If the wealth tax is likely to impact you directly, your first instinct may be to call your real estate broker and start packing. The problem is, just because you move out of California doesn’t mean you wouldn’t be subject to California’s proposed wealth tax. If you would have been eligible for the wealth tax (i.e. your net worth was greater than $30 million) sometime within the last 10 years before moving, you are still subject to the tax even after leaving the state. For the next ten years, you could be paying the wealth tax, albeit at a rate that lowers gradually every year – 90 percent the first year, 80 percent the second, etc.
The wording in the legislature specifically talks about “worldwide wealth.” It covers assets such as:
Stock in any publicly and privately traded C Corporation, Stock in any S Corporation, Interest in any partnership, Interests in any private equity or hedge fund, Interests in any other non corporate businesses, Bonds and interest bearing savings accounts, Cash and deposits, Farm assets, Interest in mutual funds or index funds, Put and call options,
If you’re worried about this proposed wealth tax and its potential impact on your financial future, get in touch with your financial advisor or accountant immediately. He or she may have more information on this bill or offer clarity and insight to your biggest questions surrounding these potential tax changes.