2018 Guide to California Personal Income Tax
California Tax Rates, Deductions, and Credits
California's income tax system differs from federal tax law in several ways, and unfortunately, not all of them are good. Many of your federal deductions might be limited or disallowed in California.
The Golden State does have some of its own deductions and credits that you might benefit from, however.
Income That's Exempt from California Income Tax
Certain types of income are exempt from income tax in California, some of which are taxed on your federal return. Income that is exempt in California includes:
- Social Security and railroad retirement benefits, but not other private, state, local, and federal pensions
- Interest earned on federal bonds
- State income tax refunds
- Distributions from a health savings account (HSA)
- Unemployment compensation
- Paid family/maternity leave (which is taxed on your federal return)
- California state lottery winnings
Income Taxed in California That Is Not Taxed Federally
You will have to pay taxes in California on some types of income that are not taxed at the federal level, such as foreign-earned income that you may have excluded on your federal return. Interest earned on municipal, state, and local bonds from outside California is taxable.
California does not allow several federal deductions, including deductions for contributions to a health savings account (HSA), adoption expenses, federal estate taxes, 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.
You cannot increase your California standard deduction for property taxes, taxes on the purchase of a new car, or disaster losses as you can on your federal return. However, California has a few additional deductions of its own:
- Interest on loans from utility companies is deducted when the loan is used to purchase and install energy efficient equipment or products
- The amount of your federal mortgage interest credit if you qualified for it on your federal return
- Medical expenses
The deduction for medical expenses follows the federal deductibility rules. You can only deduct the portion of your medical expenses that exceed 7.5 percent of your federal adjusted gross income (AGI) in the 2018 tax year, and this threshold increases to 10 percent in 2019.
California differs from federal law in that the state allows a deduction for the medical expenses of a registered domestic partner and that partner's dependents.
California Tax Rates
California income tax rates can vary 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 on incomes over $1 million in addition to the regular tax rate for residents with incomes over that threshold.
The state has a total of 10 tax brackets as of 2018. The top individual income tax rate in California is 13.3 percent on annual incomes over $1 million. The lowest rate is one percent on annual incomes of up to $8,223.
California Standard Deductions
Standard deductions as of 2018 are $4,236 for single filers and married/registered domestic partner filers of separate returns. This increases to $8,472 for married/registered domestic partner filers of joint returns, qualifying widow(er)s, and heads of household. You can also claim a $1,050 standard deduction for each of your dependents.
California Tax Credits
Tax credits are deducted directly from any tax you owe the government, which generally makes them more valuable than deductions. Some of California's income tax credits include:
- Renters Credit: A $60 credit for single renters whose annual incomes fall below $40,078, and $120 credit for married/registered domestic partner taxpayers who file jointly and whose annual incomes fall below $80,156 as of 2018.
- Child/Dependent Care Credit: A percentage of the federal credit is allowed for qualified child/dependent care expenses. This credit is refundable.
- Joint Custody Head of Household Credit: Taxpayers who are single or married/registered domestic partners who file separately and have a child can qualify for a credit of up to $451 in 2018.
Filing Your Return
Forms can be found on the California Franchise Tax Board (FTB) website.
The FTB lists free web-based tax preparation services on their website as well. Those who meet eligibility criteria can choose to use the state’s free online return preparation tools known as ReadyReturn and CalFile. Both of these tools can be accessed on the FTB's website.