BY TONYA MORENO, CPA
California state taxes are known for being among the highest in the country. This probably doesn't come as a surprise to those who live there or do business there, but you might want to keep these tax rates in mind if you're thinking about relocating to the area.
Here's how California state taxes will affect you if you’re buying a home, making money there, or even just shopping in the Golden State.
California Sales Tax
California's state level sales tax rate remains the highest in the nation as of 2018 at 7.25 percent. And this is actually a decrease from what it once was—7.5 percent until Proposition 30 expired.
Combined with local sales taxes, the rate can reach as high as 10.25 percent in some California cities, although the average is 8.56 percent as of 2020. And this is one of three states that add on local taxes at the state level. The state rate is actually only 6 percent but adding an additional 1.25 percent local rate ratchets it up to 7.25 percent.
California's average local tax rate is 1.41 percent as of 2020 and the highest local tax rate comes in at 2.5 percent.
Other California State Excise Taxes
California is known for tacking additional excise taxes onto certain products. You'll pay an extra 33 percent if you buy fruit from a vending machine here.
And like most states, California also adds an additional tax to cigarettes and gasoline. A pack of cigarettes will cost you an extra $2.87 here. The tax used to be just 87 cents, but legislation ramped it up by an additional $2 on April 1, 2017. A little nicotine withdrawal might be easier to deal with in comparison.
Gasoline will run you an additional 12 cents a gallon under legislation that began increasing the tax incrementally effective November 1, 2017. That's the highest rate in the country. As of 2020, the average California driver pays $2.93 per gallon compared to the national average of $1.90.
The issue went to the ballot in November 2018 when opponents of the tax sought to implement a new law that prohibits any new transportation fuel taxes without a majority public vote. If passed, the new legislation would have retroactively eliminated the 2017 tax hike. Ultimately, this ballot measure was defeated.
California Property Tax
The state's property taxes actually aren't all that bad. The effective rate is .70 percent as of 2019. That ranks as the 35th lowest. Compare it to the 1.05 percent national average.
Property in California is assessed at 100 percent of its full cash or fair market value, but you might catch a few property tax breaks provided for under state law:
Under Proposition 13, the maximum tax on real estate is limited to 1 percent of its full cash value and taxes cannot increase more than 2 percent over the previous year.
Homeowners who live in their homes as their principal residences qualify for a $7,000 reduction in the taxable value of their property under the state's homestead program.
Senior citizens, the blind, and the disabled have been able to postpone their property taxes for their principal places of residence under the property tax postponement program that began on September 1, 2016.
Unfortunately, the state's homeowner and rental assistance program, which effectively reimbursed qualified taxpayers for a portion of property taxes paid on their homes or as part of their rental payments, has been discontinued.
California State Income Tax
The state also has some of the highest income tax rates in the country. California has 10 personal income tax rates ranging from 0 to 13.3 percent as of 2020. The state's standard deduction, however, is a fairly decent $4,537 per person.
Income taxes are levied on both residents’ incomes and income earned in the state by non-residents. Many states have reciprocity agreements with other states that allow non-residents to work there without paying income tax except to their home state, but California isn't one of them.
The highest rate of 13.3 percent begins at incomes of $1 million or more as of 2020. The lowest 0 percent rate is reserved for earners of less than $8,809 in taxable income.
Many federal deductions are limited or disallowed in California, but other state tax credits are available, including an exemption credit for yourself and your dependents, a credit for renters, a credit for single or divorced parents, and a credit for people who have dependent parents.
Capital Gains Tax in California
California tax law includes no special provisions for capital gains tax so unlike federal tax law, the state doesn't give you a break for long-term gains on assets you hold onto for over a year.
If you sell any property or asset for more than your tax basis or investment in it, you'll pay taxes on your profits at your personal income tax rate regardless of the duration of ownership. This means that if you fall into that 13.3 percent tax bracket, you'll pay that rate on your capital gains, too.
If your sale is such that you must also pay the federal long-term capital gains tax rate of 20 percent, you'll end up paying the second-highest capital gains tax rate in the world—a combined 33.3 percent.
California Inheritance and Estate Taxes
This is one area in which California residents really do get a tax break. When federal estate tax laws changed on January 1, 2005, the legislation eliminated California's estate tax, and the state has no inheritance tax. At least you can die here tax-free.