California's income tax system differs from the federal tax system in a few ways. Many federal deductions are limited or not allowed in California, but the Golden State does have some of its own deductions and credits that you might benefit from.
Key Takeaways
- California’s standard deductions are less than half of what they are at the federal level.
- The state’s child and dependent care credit is a fixed percentage of the federal credit.
- California imposes a 1% surcharge on very high incomes. Taxpayers who are subject to it pay a tax rate of 13.3% on their top dollars.
Income That's Exempt From California Tax
Certain types of income are exempt from tax in California, although they're taxable on your federal return.These income sources include:
- Social Security and railroad retirement benefits that aren't included in your federal adjusted gross income, but not other private, state, local, or federal pensions
- Interest earned on federal savings bonds
- State income tax refunds
- Distributions from health savings accounts (HSAs)
- Unemployment compensation
- California state lottery winnings
Taxable Income in California
The flip side is that you'll have to pay taxes in California on some types of income that aren't taxed at the federal level, such as foreign earned income that you can exclude on your federal tax return. In addition, interest earned on municipal, state, and local bonds from outside California is also taxable.
Alimony you receive is taxable income in California, although it's no longer taxable at the federal level for divorces entered into after 2018. The spouse paying alimony or spousal support is entitled to a tax deduction for that amount.
California Itemized Deductions
California doesn't allow deductions for some things the federal government allows, such as contributions to HSAs, adoption expenses, educator expenses, qualified higher education expenses, and paid state, local, or foreign income taxes. The amounts of other deductions the federal government allows, such as IRA contributions and charitable giving, are also limited in California.
But California has some deductions of its own:
- Interest on loans from utility companies is deductible when the loan is used to purchase and install energy-efficient equipment or products.
- The limit on mortgage indebtedness for the home mortgage interest deduction is $1 million in California as of the 2022 tax year, the return you file in 2023. The federal limit is $750,000.
The California Standard Deduction
The California standard deduction is much less than what's offered by the IRS. As of the 2022 tax year—the return you file in 2023—the state-level standard deductions are:
- $5,202 for single taxpayers, as well as married and registered domestic partner (RDP) taxpayers who file separate returns
- $10,404 for married and RDP taxpayers who file jointly, as well as heads of household and qualifying widow(er)s
Note
The 2022 standard deductions at the federal level are $12,950 for single taxpayers and married taxpayers filing separately, $19,400 for heads of household, and $25,500 for married taxpayers filing jointly and qualifying widow(er)s.
California Tax Credits
Tax credits are deducted from any tax you owe the government. This makes them more advantageous than deductions, which only reduce the income on which you're taxed.Some of California's income tax credits include:
- Renters Credit: This is a $60 credit for single renters whose annual incomes fall below $43,533 as of 2022. It increases to $120 for married/RDP taxpayers who file jointly and whose annual incomes fall below $87,066. The credit is nonrefundable. You must pay rent in the state of California for half the year or more.
- Child and Dependent Care Credit: A percentage of the federal credit is allowed for qualified child and dependent care expenses.This credit is refundable. Its rules largely mirror those for the federal Child and Dependent Care Credit.
- Joint Custody Head of Household Credit: Taxpayers who are single and married/registered domestic partners who file separately and have a child can qualify for this credit worth up to $556 for the 2022 tax year.
California Tax Rates
California income tax rates vary a bit from year to year. They're levied on California residents’ income and non-residents’ income from California sources.
Note
California also charges a mental health services surcharge tax of 1% on incomes over $1 million, over and above the regular tax rate for residents and certain non-residents with incomes over that threshold. The tax helps to fund the state's behavioral health system.
The state has nine tax brackets as of the 2022 tax year. California's top individual income tax rate is 12.3% on annual incomes over $677,275for single taxpayers and married or registered domestic partner (RDP) taxpayers who file separate returns. The 12.3% threshold for married and RDP partners filing jointly is $1,354,550 and $921,095 for head of household filers.
The lowest rate is 1% on annual incomes of up to $10,099 for single filers, $20,198 for married and RDP filers, and $20,212 for head of household filers for the tax year 2022.
Filing Your Return
You can find all of the forms you'll need to file your tax return on the California Franchise Tax Board (FTB) website.The FTB lists free web-based tax preparation services on its website as well. Those who meet eligibility criteria can use CalFile, the state’s free online return-preparation tool.
Frequently Asked Questions (FAQs)
Where can you find information on your California state refund?
You can check your refund status on the California Franchise Tax Board website. You'll need your Social Security number, ZIP code, exact refund amount, and the numbers in your mailing address. It takes about one month to receive a refund if you e-file. It takes about four months if you mail in a paper return.
What is a standard deduction?
A standard deduction is a dollar amount that reduces your taxable income. You can claim the standard deduction if you don't itemize your deductions. The standard deduction amount varies depending on your filing status, age, and other criteria.
Is California high in taxes?
California's income taxes are the highest in the country with the top three income brackets paying 10.30%, 11.30%, and 12.30% respectively.
My expertise lies in tax systems, specifically in California's unique income tax setup. Let me break down the concepts covered in that article.
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California vs. Federal Tax System Differences:
- Standard Deductions: California offers lower standard deductions compared to the federal level.
- Child and Dependent Care Credit: It's a fixed percentage of the federal credit.
- High-Income Surcharge: California imposes a 1% surcharge on very high incomes, making the top tax rate 13.3%.
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Exempt Income in California:
- Certain types of income like Social Security benefits, some retirement benefits, interest from federal savings bonds, HSA distributions, unemployment compensation, and state lottery winnings are exempt.
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Taxable Income in California:
- California taxes some income types not taxed federally, such as excluded foreign earned income and certain interest earnings.
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California Itemized Deductions:
- Some deductions allowed federally, like HSA contributions and certain education expenses, aren't permitted in California. Others, such as interest on utility loans for energy-efficient purchases and mortgage interest deductions, have differing limits.
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California Standard Deduction:
- Significantly lower than the federal standard deduction, varying based on filing status.
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California Tax Credits:
- Includes the Renters Credit, Child and Dependent Care Credit, and Joint Custody Head of Household Credit, offering relief by reducing the tax owed.
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California Tax Rates:
- Nine tax brackets with varying rates, ranging from 1% for lower incomes to 12.3% for higher incomes, along with an additional 1% surcharge for mental health services on incomes over $1 million.
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Filing Your Return:
- Resources for tax preparation and filing are available on the California Franchise Tax Board website, including free online tools like CalFile.
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FAQs:
- Information on how to check the status of a California state tax refund, the definition of a standard deduction, and an overview of California's high-income tax rates.
California's tax structure leans toward higher taxation, especially for higher incomes, with unique deductions, credits, and exemptions compared to the federal system. It's a complex but fascinating system to navigate, offering specific advantages and limitations to taxpayers.
