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State and local taxes are usually part of your overall cost of living in the U.S. But income taxes are, typically, only a portion of your total state- or local-level tax burden.
If you live or work in California, you may love the state’s miles of sparkling blue beaches, redwood forests and Hollywood glitz. But your California dreaming may turn into nightmares if you don’t understand the actual tax costs associated with living and working in the state.
If you’re weighing a move to this West Coast haven or already live there, here are some things to know about the different types of taxes you may face in California.
- The basics of California taxes
- California income taxes
- California sales and use taxes
- California property taxes
- California estate taxes
Tax revenue funds many public initiatives in California.
For example, income tax revenue collected by the Franchise Tax Board helps pay for the state’s roads, schools, parks and law enforcement services. The California Department of Tax and Fee Administration oversees the state’s sales and use, fuel, and tobacco taxes, which help support things like local criminal justice, local health and social services programs, and county transportation and operations.
Here’s an overview of some of the taxes you might encounter.
|Alcoholic beverage||Between 20 cents and $6.60 per wine gallon, depending on alcohol type|
|Cannabis||Generally 15% of the average market price (higher for certain types of transactions)|
|Cigarette and tobacco||14.35 cents per cigarette/$2.87 per pack of 20|
● 1.5% for S corporations
● 8.84% for corporations
● 10.84% for banks and financial companies
|Individual income||2018 personal income tax rates ranged from 1% to 12.30% (there was also a 1% Mental Health Service Tax for filers with taxable income of more than $1 million)|
|Motor vehicle fuel||47.3 cents per gallon|
|Property||Rate varies by locality|
|Sales and use||Sales tax rates range from 7.25% to 10.5% (varies by county and municipality)|
California has a progressive income tax system. Personal income tax, which is the state’s largest revenue source, is based on taxable income (income after allowable deductions) from sources like capital gains, dividends, interest, pensions, tips, wages, and other income that isn’t considered exempt from state taxation.
As of 2018, the state’s maximum tax rate on individuals is 12.3%, though people who have a taxable income of more than $1 million in a given tax year also are subject to an additional 1% tax, which is used to pay for mental health services.
Here are California’s individual income tax rates and corresponding brackets for 2018. (These could change for 2019.)
|Tax rate||Single or married/registered domestic partners filing separately||Married/registered domestic partners filing jointly or qualifying widow(er)||Head of household|
|1%||More than $0–$8,544||More than $0–$17,088||More than $0–$17,099|
What are the federal income tax brackets and rates?
Tax credits and deductions in California
If you have taxable income in California, it may be possible to reduce your tax obligation through tax credits and deductions. Here are some to consider.
- California earned income tax credit — The state has a cash back tax credit for low-income earners. Filers who earn less than $24,950 may qualify for the credit. In 2018, this tax credit provided $400 million to 1.4 million tax filers.
- Renter’s credit and other credits — For 2018, California’s nonrefundable renter’s credit ranged from $60 to $120, depending on a taxpayer’s filing status and adjusted gross income. The state also has a senior head-of-household credit, which maxed out at $1,434 for qualified filers in 2018, and a joint custody head-of-household credit/dependent parent credit that can’t exceed $469 for qualified filers.
- Standard deduction — Californians can benefit from standard deductions that can reduce their taxable income. Deductions also vary by filing status. For 2018 the deductions were $4,401 for single filers or married/registered domestic partners filing separately; $8,802 for married/registered domestic partners filing jointly, head of household or qualifying widow(er); and $1,050 minimum standard deduction for dependents.
Filing income taxes in California
In 2018, if you were a full-year resident of California, you probably used Form 540 2EZ or 540 to file your state income taxes. If you were a nonresident or only lived in California for part of the year, you likely used Form 540NR. The form has short and long versions.
You have multiple ways to file your California state tax return.
- File online. You can use CalFile, the state’s online tax-filing system, to file your return for free. You must create an account on the Franchise Tax Board’s website to use this service. You may also be able to use Credit Karma Tax® to file for free. Other free-filing options may also be available, based on income limitations. And of course you have the option of using a fee-based e-file provider.
- File by mail. Once you complete your tax return, you can mail it to the Franchise Tax Board. The agency provides the relevant mailing address for each tax form on its website.
California applies a state sales tax to all retail sales of goods and merchandise, though there are some exemptions. The state has a use tax that applies to the storage, use or other consumption of goods not subject to the sales tax — including items purchased in another state by mail, phone or internet and then shipped into the state.
The sales and use tax rate in any locality in California is composed of the state tax rate, a local tax rate (if any) and any district tax rate that may apply.
Property taxes are typically levied at the county and municipal level.
In California, property tax rates are limited. Counties and municipalities are allowed to tax 1% of a property’s assessed value, plus an additional rate needed to fund local voter-approved bond debt. But property owners in California may also face local taxes, such as for school districts, for the tax year.
According to the Lincoln Institute, California ranks 23rd in the nation for per capita property tax obligation, while its average per capita property tax levy is slightly lower than the U.S. average.
California doesn’t currently have an estate tax, but the state legislature is considering a bill that could enact an estate tax. If adopted, the bill would put the creation of a statewide estate, gift and generation-skipping transfer tax (on estates of more than $3.5 million and more than $7 million for married couples) up to a public vote. Money raised from the tax would be used for a fund to support programs and services aimed at alleviating socio-economic inequality in the state.Learn more about the federal estate tax
No matter where you live, your total tax burden is made up of much more than just your federal and state income tax obligation. States like California often fund their operations through other types of taxes, like sales or property taxes, that can directly affect your financial well-being. That’s why it’s important to understand all the state-level taxes you may be subject to.
Jennifer Samuel, senior tax product specialist for Credit Karma Tax®, has more than a decade of experience in the tax preparation industry, including work as a tax analyst and tax preparation professional. She holds a bachelor’s degree in accounting from Saint Leo University. You can find her on LinkedIn.