California has a complex tax structure, which makes tax planning a bit more challenging than usual for businesses and individuals operating in California.
The state imposes various sorts of taxes on its citizens. The state also has a progressive income tax system with numerous tax brackets and rates that rise as income levels increase.
Top earners in the highest tax bracket pay 12.3% of their total taxable income for California state taxes. That said, the state permits certain tax credits and deductions to reduce the tax liability.
The California tax system is currently administered by various tax agencies, including the California Department of Tax and Fee Administration (CDTFA) and local tax authorities.
The tax money is spent on government aid programs, education, healthcare, public safety, social services, environment protection, transportation, and other vital needs of the citizens.
Here are the common tax exemptions in California.
Sales Tax Exemptions
Food Products
Raw and uncooked food items usually found in a grocery store (unless sold in a heated form) are exempted from state taxes. The non-taxable foods include raw fruits, vegetables, rice, pasta, unprepared meat, dairy products, bottled water, and dietary supplements.
Prescription Medicine
California state taxes do not apply to medications a licensed healthcare provider prescribes. However, over-the-counter drugs without a prescription are not exempted from state taxes. They fall into the taxable category.
Medical Devices
The sale or use of medical devices intended to diagnose or treat illnesses is not taxable. Similarly, medical devices prescribed by a licensed healthcare provider for specific medical conditions may qualify for a tax exemption.
Agricultural Supplies and Equipment
Partial or full tax exemptions are offered on qualifying farm supplies and equipment, such as agricultural resources for timber production, seeds and plants for enhancing crop cultivation, and purchase of specific livestock for agriculture purposes.
Similarly, purchasing farm equipment like tractors, plows, fertilizer spreaders, specific fertilizers, and chemicals may qualify for partial exemption depending on their use and certain other criteria.
Alternate Energy Equipment
California provides sales tax exemption to qualifying manufacturing and research and development machinery used for producing alternate energy. Qualifying purchasers can buy eligible equipment without paying state taxes on them.
Manufacturing and Research & Development Equipment
Under the California State Tax Exclusion (STE) program, partial state tax exemption is offered for purchasing qualifying manufacturing, research and development equipment. This includes machinery and equipment purchased for testing, prototyping, and other research and development activities.
Property Tax Exemptions
Homeowners’ Exemption
California offers homeowners’ tax exemption to those who own and occupy their primary residence. The property tax liability is reduced by lowering the assessed value of the property by a set dollar amount (maximum up to $7000).
Disabled Veterans’ Exemption
Depending on the disability income and rating, eligible veterans or their (unmarried) surviving spouses may qualify for a reduced property tax on their primary residence. Up to $7000 would be reduced from the assessed value, resulting in a lower property tax liability.
Welfare Exemption
This specific exemption applies to non-profit establishments that use their properties for public welfare activities. Common examples of welfare tax exemption include properties owned by hospitals, schools, churches, and non-profit organizations utilized exclusively for educational, religious, charitable, or medical purposes.
Certain vans and buses used for furthering charitable work may also be recognized for property tax exemption. However, properties or vehicles used for commercial purposes not related to the tax-exempted activities will not qualify for property tax exemption benefits.
Church Exemption
Churches and religious establishments can enjoy some property tax benefits on real properties used for religious purposes. To reap the tax benefits, the property must be owned by the church and used exclusively for religious activities. The property cannot be used for other income-earning purposes.
College Exemption
Certain public educational institutes, such as the University of California, California State University (CSU), and community colleges, are exempted from property taxes (on their real property) because the state usually owns the property.
Some other private colleges in California owned by non-profit organizations may also qualify for property tax exemption if their property is used exclusively for charitable, religious, or educational purposes.
Income Tax Exemptions
Social Security Benefits
Since Social Security benefits are an important source of income for seniors and retirees, California has a generous tax policy on them. California is one of the few states in the United States that does not impose taxes on Social Security benefits.
California State Income Tax Refunds
If taxes are overpaid, the extra amount will be refunded to the taxpayer. An excess tax credit is also issued when taxpayers qualify for certain tax credits. Examples of refundable tax credits include the Dependent Care Expenses credit and the California Earned Income Tax Credit.
Unemployment Compensation
Unemployment Compensation is not subject to California state taxes, helping the recipient save a significant amount of money when filing state tax returns. Exempting taxes on unemployment compensation aligns with the state’s commitment to providing financial relief to unemployed citizens during financial crises.
Workers’ Compensation Benefits
The tax treatment of Workers’ Compensation benefits is the same as the Workers’ Compensation benefits. In the interest of its citizens, California does not impose taxes on Workers’ Compensation benefits. Both temporary and permanent disability benefits are exempted from state taxes.
Public Assistance Payments
On most types of public assistance payments, California does not impose any taxes. The exempted public assistance payments include Temporary Assistance for Needy Family (TANF), Supplemental Security Income (SSI), Med-Cal, General Assistance (GA), CalWORKs, and In-Home Supportive Services (IHSS).
Other Tax Exemptions and Exclusions
Gasoline Tax Exemptions
There are certain exemptions to specific uses of gasoline in the state of California. For instance, certain non-profit organizations and government agencies may be exempted (fully or partially) from taxes for gasoline purchases. These exemptions are based on special approvals.
Vehicle License Fee Exemptions
Certain vehicle licenses may be fully exempted or eligible for reduced taxes based on specific situations. Qualified disabled individuals and active-duty military service personnel can apply for a Vehicle License fee (VLF) exemption. Some agricultural vehicles utilized for farming purposes may also qualify for reduced VLF rates.
Cigarette and Tobacco Products Tax Exemptions
Limited tax exemptions are available for cigarettes and other tobacco products in California. For instance, the Native American tribes may incur low to no tax liability from the sale of cigarettes and tobacco products on tribal lands. Subject to strict rules, some non-profit establishments promoting public health can also be eligible for reduced tax rates.
How to Apply for Tax Exemptions in California?
Once you qualify for a specific tax exemption, find out which state agency in California administers the exemption you are seeking. Then, gather all the documents and submit the application form to the relevant agency. You can easily obtain the application form from the state agency’s website. Upon approval, stay compliant with the specific tax-exemption reporting.
Conclusions: Understanding California’s Tax System and Exemptions
California has various taxes and regulations. Individuals or businesses with financial interests should be aware of them to avoid trouble with the law. At the same time, one should have the most updated information about the available tax exemptions that apply to their tax situation, which can reduce the overall tax liability.