California state income tax laws are different from federal tax law in many ways — both good and bad. While state law gives the taxpayer beneficial credits and deductions, it also restricts or denies some federal deductions. It’s important to know the type of income that's exempt from income tax in California, plus the credits and deductions that are available, so you pay the correct amount of tax.
Income Taxed in California
Income taxed in California that’s not subject to federal income tax includes foreign-earned income and interest earned on municipal, state and local bonds from outside California.
Income Exempt From Tax
Some types of income are exempt from tax in California (although they may be taxed on the federal return). These include:
- Social Security and railroad retirement benefits.
- Interest earned on federal bonds.
- State income tax refunds.
- Health savings account (HSA) distributions.
- Unemployment compensation.
- Paid family/maternity leave (this is taxed on the federal return).
- California state lottery winnings.
Private, state, local and federal pensions are not exempt from income tax in California.
California Income Tax Deductions
Several federal income tax deductions are not permitted in California, such as adoption expenses, federal estate taxes, deductions for contributions to a health savings account (HSA), educator expenses, qualified higher education expenses, and paid state, local or foreign income taxes. California income tax rules also restrict other federal deductions, such as IRA contributions.
While a taxpayer can raise his federal deduction for disaster losses, property taxes and taxes on the purchase of a new car, he can’t do this at the state level in California.
On the plus side, California income tax law provides a few other deductions, including medical expenses; federal mortgage interest credit if it qualifies as a deduction on the federal return; and interest on loans from utility companies if the loan is used to purchase and install energy-efficient equipment or products.
Federal deductibility rules apply to the deduction for medical expenses. Only the portion of medical expenses that exceed 10 percent of the federal adjusted gross income (AGI) in the 2019 tax year can be deducted. Under California law, a deduction is also allowed for the medical expenses of a registered domestic partner and the partner’s dependents.
California Tax Rates
California income tax rates are based on the income of California residents as well as on the income earned by non-residents from California sources.
As of late 2019, the state has a total of 10 tax brackets. The highest bracket is 13.3 percent on annual earnings over $1,000,000 (due to an additional 1 percent charge for mental health services on earnings on top of the standard 12.3 percent tax rate for any resident who earns more than that amount). The lowest tax bracket in California is 1 percent on an annual income of up to $8,809.
California Standard Deductions
For 2019 taxes, the standard deduction is $4,537 for single filers and married or registered domestic partners who file separate returns. This increases to $9,074 for married or registered domestic partners who file joint returns, qualifying widows or widowers, and heads of household. Every taxpayer can also claim a $378 exemption for each dependent.
California Tax Credits
Some of California’s income tax credits (deducted directly from any tax owed to the government) in 2019 include:
- Nonrefundable renters’ credit: A single renter benefits from a $60 credit if her annual income falls below $41,641. The amount is $120 for married or registered domestic partners who file jointly and whose combined annual income is less than $83,282.
- College access tax credit: If someone contributes to the California Access Tax Credit (CATC) Fund, which helps provide financial aid to low-income college students, she can claim the college access tax credit and receive a tax credit of 50 percent of her contribution.
- Joint Custody Head of Household Credit: A taxpayer who is single and has custody of a child, stepchild or grandchild and pays for more than half of that child’s expenses can qualify for a credit of up to $469. The same applies to married or registered domestic partners who file separately.
Filing Your California Tax Return
Forms required to file a California income tax return can be found on the California Franchise Tax Board (FTB) website. It’s important to use the correct form, which depends on filing status, for example, whether you’re filing as a single, married couple or head of household. The FTB website also contains a California income tax calculator.
California state individual income tax returns are due by April 15. If someone is not ready to file his state tax return by that date, he can get an automatic six-month tax extension and have until October 15 to file his return. No form is required to apply for a state tax extension in California. An automatic extension is granted as long as any tax balance that’s owed is paid by the original deadline of April 15.
- State of California Franchise Tax Board: Standard deductions, exemption amounts, tax rates, and doing business thresholds updated for 2019
- State of California Franchise Tax Board: File
- State of California Franchise Tax Board: Tax Calculator, tables, rates
- State of California Franchise Tax Board: Due Dates
- State of California Franchise Tax Board: Credits
- State of California Franchise Tax Board: Personal Income Tax Booklet
- CA.gov: Mental Health Services Act