California imposes a state income tax on income derived from California sources by residents of the state and certain non-residents.
In California, taxable income includes wages and salaries, business and self-employment income, interest and dividend income, capital gains and losses, rental and royalty income, retirement income (with some exceptions), unemployment compensation, alimony received, gambling winnings, and various types of miscellaneous income such as hobby or barter income.
What Income is Taxable in California?
Taxable income in California usually includes earnings from the following sources:
1. Wages and Salaries
In California, wages and salaries earned by residents from Californian or non-Californian-based companies are subject to California state income tax.
2. Business and Self-Employment Income
If you run a business or are self-employed in the state of California, you are required to pay taxes on your earnings. Business and self-employment income are subject to quarterly and yearly tax filing.
3. Interest and Dividend Income
Interest and dividend income from bonds, stocks, mutual funds, savings accounts, and other interest-yielding investments are taxable by California state income tax.
4. Capital Gains and Losses
Capital gains and losses will also have tax implications. The California state income tax law allows citizens to offset capital losses against other income up to a certain limit.
5. Rental and Royalty Income
Income earned from royalties and rents are subject to taxes. Therefore, income earned from intellectual and real properties must be accurately reported for state tax purposes.
6. Retirement Income
Most pension income and similar retirement income are partially or fully taxable. However, certain types of retirement income are relieved from taxes in California.
7. Unemployment Compensation
The state unemployment benefits, including pandemic-related unemployment benefits, are taxable by the state income tax, with the option of withholding a portion of the benefit to cover the tax liability.
8. Social Security Benefits
The Social Security Benefits are exempted for state tax purposes. Therefore, you won’t have to report the Social Security benefits while filing the California state income tax return.
9. Alimony and Child Support
Alimony received is usually taxable. The good news is that California does not levy taxes on child support payments to ensure that the child support process is not compromised due to additional tax liability.
10. Gambling Winnings
Irrespective of the amount, all gambling winning must be reported for state tax purposes. Even non-cash prizes, such as vacations and bikes, are generally taxable by California state income tax.
11. Miscellaneous Income
State taxes must be paid on various other types of miscellaneous income, such as hobby income, barter income, winning from game shows, and forgiven debt.
What Income is Not Taxable in California?
Like other states in the United States, certain types of income are exempt from California state income tax.
1. Certain Types of Interest Income
Tax exemptions are provided for interest earned from certain Municipal Money Market funds, Health Savings Accounts, U.S. Government bonds, Municipal bonds, and bonds issued by the state. Also, interest earned from savings accounts like certain California College Savings Plan are not taxable by California state income tax.
2. Gifts and Inheritances
Gifts received by residents of California are not taxable. Similarly, California does not impose taxes on inheritances. So, residents of California can receive gifts and inherit properties without worrying about taxes at the state level.
3. Certain Types of Retirement Income
State tax exclusions are available for income earned from Social Security benefits, Federal retirement benefits, Military retirement pay, Railroad retirement benefits, traditional IRAs, 401(k) plans, and income distribution from CalPERS and CalSTRS retirement plans.
4. Workers’ Compensation Benefits
Workers’ Compensation benefits are exempted for taxes at the state level. So, you won’t have to report Workers’ Compensation benefits as taxable income in your tax return form. This tax exemption ensures that the compensated worker faces no additional financial burden.
5. Welfare and Public Assistance Benefits
Since Welfare and Public Assistance Benefits are designed to help low-income earning individuals or families facing financial hardships, they are exempted from taxes for California state tax purposes. After all, imposing taxes would work against the primary purpose of financial assistance.
6. Certain Types of Disability Income
The California state income tax exempts certain types of disability income from taxes, such as State Disability Insurance, Social Security Disability benefits, Veterans Disability benefits, Railroad Retirement Disability benefits, and Private Disability insurance benefits.
California Income Tax Rates and Bracket
Like many other states in the United States, California adopts a progressive tax system, which usually means that individuals earning more will pay higher taxes.
Here’s the California tax table for your reference.
| Tax Rate | Single Filers | Taxed Owed |
| 1% | $0 to $10,099 | 1% of the taxable income |
| 2% | $10,100 to $23,942 | $100.99 + 2% of the amount over $10,0999. |
| 4% | $23,943 to $37,788 | $377.85 + 4% of the amount over $23,942. |
| 6% | $37,789 to $52,455 | $931.69 + 6% of the amount over $37,788. |
| 8% | $52,456 to $66,295 | $1,811.71 + 8% of the amount over $52,455. |
| 9.3% | $66,296 to $338,639 | $2,918.91 + 9.3% of the amount over $66,295. |
| 10.3% | $338,640 to $406,364 | $28,246.90 + 10.3% of the amount $338,639. |
| 11.3% | $406,365 to $677,275 | $35,222.58 + 11.3% of the amount over $406,364. |
| 12.3% | $677,276 or more | $65,835.52 + 12.3% of the amount over $677,275. |
| Tax Rate | Married/Joint Filers | Tax Owed |
| 1% | $0 to $20,198 | 1% of taxable income. |
| 2% | $20,199 to $47,884 | $201.98 + 2% of the amount over $20,198. |
| 4% | $47,885 to $75,576 | $755.70 + 4% of the amount over $47,884. |
| 6% | $75,577 to $104,910 | $1,863.38 + 6% of the amount over $75,576. |
| 8% | $104,911 to $132,590 | $3,623.42 + 8% of the amount over $104,910. |
| 9.3% | $132,591 to $677,278 | $5,837.82 + 9.3% of the amount over $132,590. |
| 10.3% | $677,279 to $812,728 | $56,493.80 + 10.3% of the amount over $677,278. |
| 11.3% | $812,729 to $1,354,550 | $70,445.15 + 11.3% of the amount over $812,728. |
| 12.3% | $1,354,551 or more | $131,671.04 + 12.3% of the amount over $1,354,550. |
Deductions and Credits in California
Standard Deductions
These are fixed and predetermined deductions that taxpayers in California can use to reduce their overall taxable income.
Itemized Deductions
These are specific expenses that taxpayers can deduct from their total income to lower their taxable income. These expenses include charitable donations, mortgage payments, property taxes, medical expenses, and theft losses.
Credits
Here are some tax credits that can be applied to your tax returns when filing your California state income tax.
California Earned Income Tax Credit (CalEITC): The CalEITC was designed to help low-to-moderate income-earning families financially.
Child and Dependent Care Expenses Credit: This tax credit is for the expenses that go into the caretaking of qualifying dependents.
Child Tax Credit: Child tax credit can be claimed on own child, adopted child, foster child, stepchild, or dependent qualifying siblings.
Renters’ Credit: The Renters’ Credit is made available to low-income renters in California.
Senior Head of Household Credit: This tax credit is available for eligible senior citizens (age 65 or above) who contribute to more than half the household expenses.
College Access Tax Credit: The College Access Tax Credit is for taxpayers saving for higher education.
Film and Television Tax Credit: The goal of this tax incentive is to motivate production companies to produce films and TV shows.
Alternative Minimum Tax (AMT) Credit: The AMT Credit provides an exemption amount to reduce the overall taxable amount.
New Employment Credit: The New Employment Credit offers tax incentives to companies to hire employees living in areas characterized by economic challenges or high unemployment rates.
Research and Development (R&D) Credit: The California State Income Tax offers R&D tax credit to businesses involved in research and innovation activities.
How to File Your California State Income Tax Return
Depending on your tax situation and preference, you can file tax returns online or offline. First and foremost, you must gather all the relevant income and expenses-related documents, such as W-2 Forms, 1099-G Forms, and so on.
Once you have gathered all the financial information, you can file the taxes. The usual deadline for California state income tax returns is April 15th. However, the deadline can change slightly every year. Sometimes, it may extend by many months.
To complete the process electronically, visit https://www.ftb.ca.gov/file/index.html and file your taxes directly with the state for free. Alternatively, you can download all the necessary tax forms from https://www.ftb.ca.gov/forms and mail them to the specified address in the instructions.
If you think that the tax filing process is too complex for you, it’s better to hire a tax professional to take care of the taxation process. Irrespective of how you file your taxes, keeping a copy of everything for possible future audits is always advisable.
Conclusion: Understanding Your Taxable Income in California
Understanding your taxable income in California is important to ensure compliance with the law and to optimize your tax situation. By identifying the source of income and by applying possible deductions and tax credits, you can lower your total tax liability and save more money in the process.