California personal income tax

California personal income tax
Name	California Personal Income Tax
Country	United States
Subdivision	State of California
Admin	California Department of Tax and Fee Administration
Type	Progressive tax
Enacted	1935
Legal code	Revenue and Taxation Code

California personal income tax. It is a major source of revenue for the State of California, funding essential services such as University of California and California Department of Transportation projects. Administered by the California Department of Tax and Fee Administration, the tax is imposed on the taxable income of residents and on the California-source income of nonresidents. Its structure is defined by the Revenue and Taxation Code and is known for its progressive rate system and unique provisions like the Mental Health Services Act.

Overview

The modern framework was established following the passage of Proposition 13, which shifted greater fiscal reliance onto income taxes. Key legislative milestones include the Personal Income Tax Law and subsequent voter initiatives like Proposition 30. The tax system interacts with the Internal Revenue Code but maintains distinct rules for items such as capital gains and retirement income. Revenue collection is a critical function of the California Department of Tax and Fee Administration, overseen by the California State Controller.

Tax rates and brackets

California employs a graduated rate structure with ten brackets, ranging from 1% to 12.3%, with an additional 1% surtax on high incomes for the Mental Health Services Act. For the 2023 tax year, the top marginal rate applies to income over $1 million for single filers. These brackets are adjusted annually for inflation based on the California Consumer Price Index. The system also includes a alternative minimum tax calculation, which operates parallel to the federal Alternative Minimum Tax.

Filing status and exemptions

Taxpayers must select a filing status that mirrors federal options: single, married filing jointly, married filing separately, or head of household. California does not conform to the federal personal exemption but offers a dependent exemption credit. Special rules apply for registered domestic partners following the California Domestic Partner Rights and Responsibilities Act. The Franchise Tax Board provides detailed guidelines for determining status, especially for part-year residents.

Deductions and credits

While California generally allows the federal standard deduction, it disallows the state and local tax deduction for its own taxes. Significant credits include the California Earned Income Tax Credit, the Young Child Tax Credit, and the Renter's Credit. Itemized deductions follow federal rules but with specific limitations, such as those for mortgage interest on high-value homes. Special deductions exist for contributions to the California College Savings Plan and certain disaster losses declared by the Governor of California.

Payment and withholding

Employers are required to withhold California income tax from wages paid to employees working within the state, following guidelines from the Employment Development Department. Estimated tax payments are mandated for individuals with significant non-wage income, such as from S corporations or partnerships. Payments can be made electronically through the California Department of Tax and Fee Administration's system. Failure to pay may result in penalties assessed by the Franchise Tax Board.

Residency and sourcing rules

An individual is considered a resident if they are in California for other than a temporary or transitory purpose, a standard established in the Revenue and Taxation Code. Nonresidents are taxed only on income from California sources, which includes income from real property located in the state and services performed within its borders. The Franchise Tax Board uses the "closer connection" test and the "domicile" principle, often referencing cases like Appeal of Herbert M. and Jane H. Keesling. Special rules apply to professional athletes, entertainers, and members of the United States Armed Forces.

Recent changes and legislation

Recent years have seen significant changes, including the expansion of the California Earned Income Tax Credit through Assembly Bill 91. The Tax Cuts and Jobs Act of 2017 created numerous federal-state discrepancies, leading to legislative adjustments in Sacramento. Voter-approved measures like Proposition 19 altered property tax transfer rules impacting income tax calculations. Ongoing debates in the California State Legislature frequently center on adjusting top rates and expanding credits, influenced by reports from the Legislative Analyst's Office.

Category:Taxation in California Category:State taxes in the United States