USA – CALIFORNIA Law and Practice Contributed by: Jennifer Jordan McCall, Matthew Perotti, Maria Williams and Alexandria Marx, Pillsbury Winthrop Shaw Pittman LLP
1.3 Income Tax Planning California Capital Gain or Loss Adjustment California capital gains are taxed at ordinary income tax rates. Appreciated assets receive a step up in basis to their fair market value at the time of death. In California, a special planning opportunity exists that property held as community property will receive a full step up on the entire property upon the death of the first spouse to die, even though that spouse is only deemed to own one-half of the community property assets. (IRC Section 1014 (b)(6).) 1.4 Pre-Immigration and Exit Planning Pre-Immigration Planning Pre-immigration planning is available and should be completed before the individual becomes a US income tax resident, transfer-tax domiciliary, or California resi - dent. US income tax residence generally arises under the green card test or substantial presence test, while California taxes residents on all income regardless of source. Common planning includes accelerating income, gains, trust distributions, foreign pension distributions, equity vesting, or deferred compensation before US or California residency begins. Foreign retirement plans and deferred compensation arrangements should be reviewed before the individual performs US services, particularly for potential issues under IRC Sections 409A and 457A. Pre-immigration gift planning may also be useful. Community property and California estate tax rules may apply to non-citizens. For example, if at least one spouse is a California citizen, community property rules (ie, a 50% division of property) apply to both spouses. While California expressly prohibits state or local taxes on gifts (Rev. and Tax. Code section 13301), the US does impose federal taxes on gifts of certain US-situs real and tangible personal property, not on most intangible property. For 2026, the federal estate, gift and GST exemption is USD15 million per individual; the annual gift tax exclusion is USD19,000; and the annual exclusion for gifts to a non-citizen spouse is USD194,000.
spouse’s or registered domestic partner’s federal exemption is portable to the survivor, the deceased spouse unused exemption (DSUE) amount. The sur - vivor elects portability by reporting the value of the deceased spouse’s or partner’s estate on the date of death, less taxable gifts, on IRS Form 706. Alternative Minimum Tax Exemption The federal AMT exemption amount for tax year 2026 starts at USD90,100 for unmarried individuals, USD70,100 for married individuals filing separately, and USD140,200 for married couples filing jointly) and begins to phase out at USD500,000 for unmarried individuals and married individuals filing separately, and USD1,000,000 for married couples filing jointly. The exemption is fully phased out at USD680,200 for unmarried individuals, USD640,200 for married individuals filing separately, and USD1,280,400 for married couples filing jointly and surviving spouses. The federal AMT exemption amount for tax year 2026 starts at USD31,400 for estates and trusts and begins to phase out at USD104,800. The exemption is fully phased out for estates and trusts at USD167,600. California imposes a 7% alternative minimum tax on California does not impose a gift tax. However, there is a substantial federal gift tax. The United States fed - eral annual gift tax exclusion allows the taxpayer to transfer tax-free gifts to any number of individuals up to USD19,000 in 2026 as per individual recipient. If the recipient receives more than the exclusion, the excess is charged against the lifetime gift and estate tax exemption of USD15 million in 2026. Gifts are reported on IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. The tax rate on gifts exceeding the lifetime gift and estate tax exemption is between 18% and 40%. The lifetime gift exemption and the estate tax have a single combined exclusion. Accordingly, lifetime gifts will reduce the exemption remaining to be applied against estate taxes at death. individuals, subject to ongoing change. Annual Gift and Estate Tax Exclusion
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