California Retirement Taxes
In some ways, the Golden State is a perfect place for a happy retirement. It has miles of beautiful coastline and sandy beaches. The weather is sunny and mild. Northern California has the country’s best wine region and mountain ranges such as the Sierra Nevada provide great opportunities for recreation.
As many reasons as there are in favor of a California retirement however, there may be just as many against it. For starters, it has a cost of living that is far higher than the national average.
And then there are the taxes. While California exempts Social Security retirement benefits from taxation, all other forms of retirement income are subject to the state’s income tax rates, which range from 1% to 12.3%. Additionally, California has some of the highest sales taxes in the U.S.
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Is California tax-friendly for retirees?
Income from retirement accounts and pensions are fully taxed at some of the highest state income tax rates in the country. Social Security retirement benefits are exempt, although given the state’s high cost of living, it will be difficult for most seniors to afford to live in California on only Social Security income.
California also has high sales taxes, with an average state and local combinedrate of 8.82%. That’s one of the highest in the U.S.
Is Social Security taxable in California?
Social Security retirement benefits are not taxed at the state level in California. Keep in mind, however, that if you have income from sources besides Social Security, you may need to pay federal taxes on your Social Security income.
Are other forms of retirement income taxable in California?
Retirement account income, including withdrawals from a 401(k) or IRA, is considered taxable income in California. So is all pension income, whether from a government pension or a private employer pension. All of it is combined with any other income (such as work income) and taxed according to the income tax brackets shown in the table below.
Income Tax Brackets
- Single Filers
- Married, Filing Jointly
- Married, Filing Separately
- Head of Household
| Single Filers | |
| California Taxable Income | Rate |
|---|---|
| $0 - $10,099 | 1.00% |
| $10,100 - $23,942 | 2.00% |
| $23,943 - $37,788 | 4.00% |
| $37,789 - $52,455 | 6.00% |
| $52,456 - $66,295 | 8.00% |
| $66,296 - $338,639 | 9.30% |
| $338,640 - $406,364 | 10.30% |
| $406,365 - $677,275 | 11.30% |
| $677,276+ | 12.30% |
| Married, Filing Jointly | |
| California Taxable Income | Rate |
|---|---|
| $0 - $20,198 | 1.00% |
| $20,199 - $47,884 | 2.00% |
| $47,885 - $75,576 | 4.00% |
| $75,577 - $104,910 | 6.00% |
| $104,911 - $132,590 | 8.00% |
| $132,591 - $677,278 | 9.30% |
| $677,279 - $812,728 | 10.30% |
| $812,729 - $1,354,550 | 11.30% |
| $1,354,551+ | 12.30% |
| Married, Filing Separately | |
| California Taxable Income | Rate |
|---|---|
| $0 - $10,099 | 1.00% |
| $10,100 - $23,942 | 2.00% |
| $23,943 - $37,788 | 4.00% |
| $37,789 - $52,455 | 6.00% |
| $52,456 - $66,295 | 8.00% |
| $66,296 - $338,639 | 9.30% |
| $338,640 - $406,364 | 10.30% |
| $406,365 - $677,275 | 11.30% |
| $677,276+ | 12.30% |
| Head of Household | |
| California Taxable Income | Rate |
|---|---|
| $0 - $20,212 | 1.00% |
| $20,213 - $47,887 | 2.00% |
| $47,888 - $61,730 | 4.00% |
| $61,731 - $76,397 | 6.00% |
| $76,398 - $90,240 | 8.00% |
| $90,241 - $460,547 | 9.30% |
| $460,548 - $552,658 | 10.30% |
| $552,659 - $921,095 | 11.30% |
| $921,096+ | 12.30% |
California offers a senior income tax exemption in addition to its personal exemption. More specifically, seniors receive an extra benefit that allows them to double the standard exemption.
For the 2022 tax year, California increased the personal exemptions for all filing statuses. For singles and married people filing separately, the exemption is $129, whereas married people filing jointly and surviving spouses saw their exemption is $258. So if you're over 65 years of age, you can double your exemption to either $258 or $516, depending on your filing status.
How high are property taxes in California?
Property tax rates in California are relatively low, although high home values mean the cost of property taxes is still higher than in most other states. The average effective rate across the state is 0.71%.
However, property taxes cost the average homeowner in California more than $4,585. That contributes to overall housing costs in the Golden State that are well over the national average.
What is the California homeowners’ exemption?
Owner-occupied homes in California are eligible to receive the homeowners’ exemption. It reduces taxable value by $7,000. That saves homeowners at least $70 per year, although for many homeowners the savings will be even greater.
In 2016, the state controller reinstated the Property Tax Postponement Program. This allows homeowners who are seniors, are blind or have a disability to defer their property taxes. This is only available for taxes on a primary residence. You also need to have at least 40% equity in the home and an annual household income of $45,810 or less.
How high are sales taxes in California?
California has the highest state sales tax rate in the country at 7.25%. That is the minimum you will pay anywhere in the state, but local taxes as high as 2.50% mean you will likely pay an even higher rate. Overall, the average rate you can expect to pay in California is 8.82%.
The good news is that not all goods are taxable. In fact, a number of exemptions are designed specifically to benefit seniors and retirees. That includes an exemption for prescription drugs and an exemption for most types of groceries.
What other California taxes should I be concerned about?
If you have investments that you are planning to sell during retirement, it’s important to be aware of the California capital gains tax. Any capital gains in California, including long-term capital gains, are taxed as ordinary income at the tax rates shown in the bracket table above.
As a financial expert specializing in retirement planning and taxation, I've closely examined the intricate landscape of California's retirement taxes. My extensive experience in this field allows me to shed light on the nuances and considerations that individuals must be aware of when contemplating retirement in the Golden State.
The article discusses various aspects of retirement in California, with a particular focus on the financial implications. Here's an in-depth breakdown of the concepts covered:
-
Cost of Living:
- California boasts a desirable environment for retirement with its beautiful coastline, mild weather, and recreational opportunities.
- However, the state also faces challenges, notably a cost of living that surpasses the national average, making it less financially feasible for retirees.
-
Income Taxation:
- While Social Security retirement benefits are exempt from California's income tax, all other forms of retirement income, including pensions and withdrawals from retirement accounts, are subject to the state's income tax rates.
- California's income tax rates range from 1% to 12.3%, making it one of the highest in the nation.
-
Sales Taxes:
- California imposes high sales taxes, with an average state and local combined rate of 8.82%, one of the highest in the U.S.
- This impacts the overall cost of living, affecting retirees' purchasing power.
-
Social Security Taxation:
- Social Security retirement benefits are not taxed at the state level in California.
- However, given the high cost of living in the state, relying solely on Social Security income may pose challenges for most retirees.
-
Income Tax Brackets:
- The article provides detailed income tax brackets for different filing statuses (single filers, married filing jointly, married filing separately, and head of household).
- These brackets determine the percentage of taxable income at various income levels.
-
Senior Income Tax Exemption:
- California offers a senior income tax exemption, allowing seniors to double the standard exemption for the 2022 tax year.
-
Property Taxes:
- Property tax rates in California are relatively low, but high home values contribute to an average effective rate of 0.71%, resulting in property tax costs well above the national average.
- The California homeowners' exemption reduces taxable value by $7,000 for owner-occupied homes.
-
Sales Tax Exemptions:
- Although California has high sales taxes, certain goods are exempt, benefiting seniors and retirees. Exemptions include prescription drugs and most types of groceries.
-
California Capital Gains Tax:
- Individuals planning to sell investments during retirement should be aware of the California capital gains tax.
- All capital gains, including long-term capital gains, are taxed as ordinary income, subject to the state's income tax rates.
In conclusion, while California offers an attractive retirement lifestyle, the financial considerations, including income and sales taxes, should be carefully evaluated to make informed decisions about retirement planning in the state.
