It’s no secret, California has earned its reputation as an expensive place to live.

Taxes can be a confusing and complicated issue, even more so when we live under 2 tax codes: CA State and Federal.

We serve numerous clients who call the Golden State their home, we believe it's important to briefly shed light on a few of the significant distinctions between California's tax laws and those federally:

Income Tax

We’ll start with the elephant in the room; California has the highest state income tax (13.3%) rates by a mile:

Source: 2023 State Income Tax Rates and Brackets | Tax Foundation

Another 1% for the 1%

In 2004, California voters passed Prop 63, which levied an additional 1% mental health tax on incomes over $1 Million.

Not Personal, Just Business

California Corporate taxes aren’t the highest in the nation, but they’re close.

At 8.84%, it’s easy to see why California is constantly ranked a Top 3 Worst Business-Tax-Climate in surveys: 2022-State-Business-Tax-Climate-Index3.pdf (taxfoundation.org).

No Break For Cap Gains

Unlike the federal government (which has preferred capital gain rates), California taxes all capital gains (short or long) as ordinary income. This tax is calculated using the same rates and brackets as all other CA income taxes.

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No Tax Deduction for College Savings:

There are 36 states (and Washington D.C.) that offer some form of tax relief on 529 college saving contributions, but California isn’t one of them.

Taking Credit Where Credit Is Due

Federal tax credits such as blindness, age 65+, and dependency can all be reduced or eliminated for higher earners in CA. Although the credits only range from $100-$400 per qualifier, they begin phasing out at incomes around $230k and higher.

HSA’s - Not powerful in CA

Health Savings Accounts offer some of the most powerful tax incentives available. Federally, It’s the only account type that is considered “Triple-Tax Free”:

1. Contributions are deductible

2. Distributions are tax-free, and

3. If invested, growth is tax-free as well.

In California though, contributions are NOT deductible from income. If that’s not enough, you’re expected to report those inner-account investment gains annually (then pay tax on them).

High Sales Tax

California has a minimum 7.25% sales tax, which is the highest base rate in the country. Several counties, including Butte (8.25%) exceed this.

AMT: There are Minimums

In case high-income individuals have found significant deductions to offset income, the state has another route to taxation: the Alternative Minimum Tax. It ensures filers pay at least 7% and begins at AGI of approximately $290k and higher.

More State Tax = more Federal Tax

California residents mourned the passing of the TJCA in 2017, which limited federal deductions of state taxes paid to $10,000.

Between the median property tax at 0.75% and other income/sales taxes, the $10k deduction limit reduced the state taxpayer’s highest federal tax return deductions.

Are Further Increases Coming?

Although not law yet, proposals are on the table which could cost higher earners more to live here.

• In recent years, members of California’s Assembly tried twice to advance an unprecedented “wealth tax” and “Exit Tax” on an individual’s net worth. Bills (AB 2088 and AB 310) even included provisions to capture revenue from wealthy residents who fled California to avoid income tax. Both would have imposed a tax (possibly levied annually for 10 years) on a California resident who leaves the state.

• Additionally, under a pending tax bill, the top 13.3% income rate could climb to 16.8%.

 We Still Love California

Above the blue and windy sea

When I come home to you, San Francisco

Your golden sun will shine for me

-Tony Bennett's “I Left My Heart In San Francisco”

While it's true that California may have the highest state tax rates, there are plenty of reasons to live here. Its thriving tech industry, historic universities, and world-class entertainment continue to attract ambitious individuals and their innovative spirit.

Moreover, California has breathtaking landscapes. From the sun-kissed southern beaches to the majestic Sierra Nevada mountains and enchanting northern Redwood forests, our state provides an unparalleled natural playground that inspires adventure and exploration.

There are still plenty of ways to avoid California taxes: Certain bond (Municipals, US Treasuries) interest is exempt from California tax, and IRA/401K/Profit Sharing contributions are deductible state and federally.

If you’re a California resident who would like help with their investment and income tax planning, give us a call at 530-487-1777 or book an appointment online here:

As always, consult your CPA for your specific tax-planning needs.

Further Reading: Check the 2023 California and Federal State Tax Rates HERE: