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A Quick Guide to California’s Income Tax System

Different states have varying income tax rate, and some charge higher than the rest. While some states have no tax on earned income, California belongs to the group of US states with the highest rates together with Hawaii, Oregon, Minnesota, and New Jersey.

California has a progressive tax rate that means you pay more as you earn more. For those earning more than $1 million, California takes away a top rate of 13.3%.

Taxes on income that are not taxed at the federal level like foreign-earned income and interest earned from bonds outside the state are taxable. There are, however, types of income exempt from income tax in the state. Among these are the following:

  • Social Security
  • Federal bonds interest
  • State income tax refunds
  • Health savings accounts distribution
  • Unemployment compensation
  • Paid family or maternity leave
  • Lottery winnings made in the State

California does not conform to federal itemized deductions, so the allowable amount in the state is different than what you would see elsewhere. For instance the federal allowable amount for real estate tax deduction is $10,000, but in California, it can be limited if it exceeds 50% of your adjusted gross income.

The state’s standard deductions is $4,401 for single filers and married/registered domestic partner filers of separate returns. Married/registered domestic partner filers of joint returns, qualifying widow(er)s, and heads of household can qualify for a deduction worth $8,802. Dependents can also claim a minimum standard deduction of $1,050.

Tax Credits

Tax credits help reduce the amount of taxes owed. In California, paying rent, having a family with children, and helping provide money for low-income college students may make you eligible for one or more tax credits.

Some of the tax credits available in California include the following:

  • This credit gives you a refund or reduces your tax owed if you have low income and work.
  • College Access Tax Credit. Can be claimed when you contribute to the California Access Tax Credit (CATC) Fund, a fund that helps provide financial aid to low-income college students.
  • Other State Tax Credit. Can be claimed if you were taxed by California and another state by offsetting the taxes paid to the other state.

If need help in making sense of California’s tax system, our business tax experts can help guide you in the right direction. Contact us today at 818-452-2641 or fill out our contact form to schedule a free consultation.

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