If you thought federal income taxes were complicated, wait till you see California. The Golden State is known for being a high-tax state with a progressive tax structure -- which means the more you earn, the more you pay. The top California state income tax bracket for 2023 is 12.3%. But you won't have to pay that percentage unless your taxable income is higher than $698,271 for single filers.
Most California taxpayers have to pay a lot less. For example, let's say that you're a single person in California who earned the U.S. median household income of $74,580, and took California's standard deduction of $5,363 with no other deductions. Your taxable income would be $69,217 -- and you'd owe $3,090 of California state income tax, or about 4.1% of your total income.
Is it worth paying 4.1% of your income to live in California? If you'd like to cut your California tax bill, there are a few state-specific tax laws, deductions, and adjustments to know about. California does not offer all of the same tax breaks that you can get from the federal government -- but there are a few items where Californians can get extra state-level tax advantages.
Let's look at a few strategies to lower your California tax bill.
1. Traditional IRA contributions
The first and most important deduction that most Californians should try to take -- which is the same for your federal tax return as it is for your California state income taxes -- is contributing to a tax-deductible traditional IRA. If you qualify for federal tax deduction by putting money into an IRA, this is an easy way to get a California state tax deduction, too.
Keep in mind that the federal government has some income limits for who can get deductions for a traditional IRA, based on whether or not you or your spouse are covered by a retirement plan at work. If you qualify for tax-deductible contributions to an IRA, this deduction will be reflected in your federal adjusted gross income, which you will report on your California state tax return. There's nothing "extra" to do to claim this IRA deduction for your California taxes; if you qualify for it at the federal level, you'll get it at the state level, too.
2. Home mortgage interest on a million-dollar home loan
On federal income tax returns, the IRS will only let people deduct home mortgage interest on up to $750,000 of "acquisition debt." California allows home mortgage interest deductions for mortgages that are larger than this federal limit.
3. Losses for personal casualty and theft
If you've had a house fire, experienced damage from a natural disaster, or suffered lost property due to theft, California will let you deduct those losses on your state income taxes. This is a more generous policy than the federal government, which only allows tax breaks for losses suffered in federally declared disasters.
4. California lottery winnings (no state income tax)
If you win the California lottery, you do not have to count your winnings as part of your taxable income for California state income taxes. However, other state lottery winnings are taxable in California. So if you must win the lottery, try to keep it within California state lines!
Don't count on some other deductions (HSAs, SALT, 529s)
Other than the traditional IRA deduction, there aren't a lot of major deductions that most Californians can take that are the same on their federal and state tax returns. Basically, California's tax code is not as forgiving as the Feds'. Some of the same rules for deductions at the federal level do not apply in California.
Here are a few types of deductions that Californians might love to take on their state income taxes -- but can't.
Health savings account (HSA) contributions
If you put money into a health savings account (HSA), you can get a deduction on your federal income taxes. But California state income taxes don't let you get this HSA deduction. So that means if you put the maximum amount of $7,750 into your family's HSA for 2023, your California taxable income would be $7,750 higher than your federal taxable income.
State and local taxes
If you take itemized deductions on your federal tax return, you're allowed to deduct up to $10,000 of state and local taxes (known as the SALT deduction). This can include some combination of state and local income taxes, property taxes, or sales taxes.
California does not allow any deduction of state and local taxes or property taxes from your state income tax return. Be prepared to adjust your California taxable income accordingly.
529 education savings plan deductions
529 plans are the best way to save for college or other qualified education expenses with tax-advantaged investment growth. Many states that charge income taxes (like my home state of Iowa) offer state income tax deductions for some contributions to 529 accounts.
But California is not one of them. If you're a California taxpayer who puts money into a California 529 account (or any other state's 529 plan), you can still get tax-free growth for the investments and tax-free withdrawals for paying for education. But you won't get a deduction on your California state income taxes.
Bottom line: Use tax software
Don't count on every federal tax break being available to you on your California state income taxes. The best tax software can help you navigate the ups and downs of filing taxes in California.
