In February 2013, Forbes.com made the observation that Californians might soon begin fleeing the state in droves due to the state's merciless tax rates. With one notable exception, California doesn't miss many opportunities to tax its residents.
Although California's lowest wage-earners pay only 1 percent in income tax, the state bumped up its tax rate for its wealthiest residents in November 2012. Retroactive to the beginning of that year, those who earn $1 million or more pay 13.3 percent. If you earn between $250,000 and $300,000, you'll pay 10.3 percent. If you're married and filing jointly, the tax rate is 9.3 percent if you earn $96,058 or more, or $48,029 if you're single.
If you think you'll catch a bit of a tax break because most of your income results from retirement sources, think again. Although Social Security and Railroad Retirement benefits are tax-free in California, virtually all pension income is taxed at full rates. Retired military can expect to pay California taxes on the same portion of their retirement pay that is subject to federal taxes. For example, disability pay for retired vets is not taxed by the IRS, and therefore California doesn't tax it either.
California's property tax rates are based on your home's full cash value at the time you buy the home, less a $7,000 homestead exemption. Property tax is levied at the rate of 1 percent. The $7,000 exemption applies only to homeowners – investment property doesn't receive the same treatment. Seniors, as well as the blind and disabled, do not receive any special property tax relief in California, although property taxes can't go up more than 2 percent a year. If you bought a home 20 years ago for $200,000 and it's worth $850,000 today, your assessed value will still be less than $300,000.
Inheritance and Estate Taxes
Two of the few things California doesn't tax are inheritances and estates. The state's estate tax laws are hitched to federal laws, and the passage of the fiscal cliff deal in 2013 eliminated estate taxes in this state.
Capital gains are typically taxed at both the state and federal level. When combined, California residents pay the second highest capital gains tax rate in the world – 33.3 percent. However, this assumes that you earn more than $400,000 a year, or $450,000 if you're married and file a joint federal return. In this case, the federal capital gains tax rate is 20 percent, added to the state's rate of 13.3 percent, for a total of 33.3 percent. If you earn less than this, the federal capital gains rate is 15 percent, so you'll pay only 28.3 percent overall.
California's state sales tax is 6.25 percent, which is high by itself. If you live in a special tax district, you must pay even more – up to 9.25 percent in some areas – because these cities and counties add on their own sales tax to the state rate. Most groceries, as well as prescription drugs and certain medical equipment, are exempt from sales tax, however.
Extra taxes apply to certain purchases in California. Between sales tax and excise tax, a gallon of gas costs about 70 cents more in this state as of July 1, 2013. This is the highest rate in the country. If you're a smoker, a pack of cigarettes will set you back an additional 87 cents.
- Retirement Living Information Center: Taxes By State
- Press-Telegram: California Raises Gasoline Tax by 3.5 Cents a Gallon
- Forbes: California's Reverse Gold Rush? Tax Exodus
- Estate Planning in California: Estate Tax 2013
- CNSNews.com: California – Second Highest Capital Gains Tax Rate in the World
- Forbes: Secrets of the Fiscal Cliff Deal
- Military.com: Taxable Income From Retired Pay
- Kiplinger: State-by-State Guide to Taxes on Retirees – California
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.