California's income tax system differs from the federal tax system in several ways. Many federal deductions are limited or disallowed in California, but the Golden State does have some of its own deductions and credits that you might benefit from.
Income That's Exempt from California Tax
Certain types of income are exempt from income tax in California, although they're taxable on your federal return. These sources of income 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 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. 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. Likewise, the spouse paying alimony or spousal support is entitled to a tax deduction for that amount.
California Itemized Deductions
California doesn't allow several federal itemized tax deductions, including those for contributions to HSAs, adoption expenses, educator expenses, qualified higher education expenses, and paid state, local, or foreign income taxes. The amount of other federal deductions, such as IRA contributions and charitable giving, are also limited in California.
California has a couple of additional deductions of its own, however:
- 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 2020 tax year, whereas the federal limit was reduced to $750,000 in 2018 under the terms of the Tax Cuts and Jobs Act (TCJA)
The California Standard Deduction
The California standard deduction is markedly less than what's offered by the IRS. As of the 2020 tax year—the return you'd file in 2021—the state-level standard deductions are:
- $4,601 for single taxpayers, as well as married and registered domestic partner (RDP) taxpayers who file separate returns
- $9,202 for married and RDP taxpayers who file jointly, as well as heads of household and qualifying widow(er)s
The 2020 standard deductions at the federal level are $12,400 for single taxpayers and married taxpayers filing separately, $18,650 for heads of household, and $24,800 for married taxpayers filing joint returns and qualifying widow(er)s.
California Tax Credits
Tax credits are deducted directly from any tax you owe the government, which makes them more advantageous than deductions. Some of California's income tax credits include:
- Renters Credit: This is a $60 credit for single renters whose annual incomes fall below $42,932 as of 2020. It increases to $120 for married/RDP taxpayers who file jointly and whose annual incomes fall below $85,864. The credit is nonrefundable, and 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 $484 for the 2020 tax year.
California Tax Rates
California income tax rates have varied somewhat from year to year. They're levied on California residents’ income and non-residents’ income from California sources.
California also charges a mental health services surcharge tax of 1% on incomes over $1 million, in addition to 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 a total of nine tax brackets as of the 2020 tax year. The top individual income tax rate in California is 12.3% on annual incomes over $599,012 for single taxpayers and married or RDP taxpayers who file separate returns. The 12.3% threshold for married and RDP partners filing jointly is $1,198,024, and it's $814,658 for head of household filers.
The lowest rate is 1% on annual incomes of up to $8,932 for single filers and $17,864 for all others in tax year 2020.
Filing Your Return
You can find all 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 typically takes three weeks to receive a refund if you e-filed and three months if you mailed in your return.
What is a standard deduction?
A standard deduction is a dollar amount that reduces your taxable income. If you don't itemize your deductions, you can take the standard deduction. The amount of the standard deduction varies depending on your filing status, age, and other criteria.