Taxes to expect when moving to California
If you're currently living in another state and are thinking of moving to California, here's what you may expect: You may pay more in personal income, business taxes, and sales taxes; you may pay less in property taxes.
Income Taxes
General Info
California has 7 tax brackets ranging from 1.0% to 10.30%. As of January 1, 2009, each tax bracket was increased by 0.25%. In 2011, the 0.25% increase goes away. For 2009, the tax table looks like this:
| Single | Married | |||
|---|---|---|---|---|
| Rate | From | To | From | To |
| 1.25% | $7,060 | $14,120 | ||
| 2.25% | $7,060 | $16,739 | $14,120 | $33,478 |
| 4.25% | $16,739 | $26,419 | $33,478 | $52,838 |
| 6.25% | $26,419 | $36,675 | $52,838 | $73,350 |
| 8.25% | $36,675 | $46,349 | $73,350 | $92,698 |
| 9.55% | $46,349 | $1,000,000 | $92,698 | $1,000,000 |
| 10.55% | $1,000,000 | $1,000,000 | ||
Most people fall into the any of the first 6 tax brackets. These brackets are adjusted for inflation or deflation, and the married filing jointly thresholds are double that of the single threshold, so there is no marriage penalty at these levels. There are also special rates for head of household. The millionaires tax, enacted by the mental health services tax, starts at $1 million for both married and single people, and is not adjusted for inflation.
Multi-state taxation
California only taxes California source income. Pretty fair. However, because of income earned in another state prior to moving to California, your federal AGI (or net income) is higher, and as a result your California income will be taxed at a higher rate.
Consider an example based on tax year 2008. Taxpayer is single and moves to California mid-year on July 1st. The taxpayer earns $30,000 prior to moving to California, and $30,000 after moving to California. The taxpayer has no itemized or above-the-line deductions.
- The taxpayer's federal AGI is $60,000.
- The California standard deduction for the whole year is $3,692.
- The taxpayer's taxable net income is the difference or $56,308.
- The California tax on this net amount is $2,932 or about 5.2071% of $56,308. Note that at this income, tax taxpayer hits the 1%, 2%, 4%, 6%, 8%, and 9.3% tax brackets.
- Since half of the $60,000 is earned in California, 50% of the taxpayer's net income is from California sources. Thus, the California tax before the exemptions credit will be half of the tax on the net amount, or $1,466.
- The total tax is the tax above minus the exemption credit. The exemption for the full year is $99, but in our scenario is is half of that or $49.50.
- The total tax is thus $1,416, which is 4.72% of the California source income.
By contrast, if the taxpayer only made $30,000 in California and resided in California all year, then their tax rate would be 1.8033% instead of 4.72% — about a third as much:
- The taxpayer's taxable income is $26,308 (their net income minus the full year standard deduction).
- The tax before the exemption credit is $640. The tax on $60,000 is considerably higher because of the progressive tax rate structure. The tax on $30,000 is considerably lower, and the taxpayers only hits the 1%, 2%, 4%, and 6% tax brackets.
- After the full year exemption credit the tax is $541, which is 1.8033% of the California source income.
Official documentation:
Business Taxes
If your operate a business other than a sole proprietorship in California — meaning a C corporation, S corporation, LLC, or LLP — then be aware that there is an annual franchise tax of $800 a year. It doesn't matter where the business is headquartered. The $800 tax is due even if the business suffers a loss, and is due with the first quarterly payment. The minimum tax is waived for the first year for a C or S corporation.
Homeowner's associations and non-profit corporations have to apply for an exemption from the minimum tax.
S corporations also have a 1.5% surtax on distributions, but if the minimum franchise tax is more, you only pay the minimum franchise tax. So for example if your California S corp has $1,000,000 in ordinary income, you have to pay the $800 minimum tax plus $14,200 of distribution tax, for a total of $15,000 in tax.
There is an employment training tax of about $7 for each employee that you hire.
Official documentation:
Sales Tax
The state sales tax was increased by 1% on April 1, 2009. The 1% increase will go away after June 30, 2011. Various cities and counties have their own additions to the sales tax, many of which have been increased in the past or current year. For example, in San Francisco the net sales tax is 9.50%. In Alameda County, just east of San Francisco, the net sales tax is 9.75%. However, after June 30, 2011 all of these rates will drop by 1%.
Official documentation:
Use tax on cars and boats
If you purchase a new or used car 12 months before moving to California, you may owe use tax on the car. Use tax is essentially the same as sales tax, except it is paid to the DMV when you register your car in California. The law does allows an exemption from the use tax if you can prove that you did not purchase the car for use in California, although the burden of proof is on you.
However, you get a credit for tax paid to the other state, so you're only taxed on the difference between California's sales tax rate and the other state's sales tax rate. If the other state's sales tax rate is higher, you don't get any money back from California.
Official documentation:
Cell Phone Taxes
When you purchase a new cell phone contract, the cell phone company often offers you free or discounted prices on phones if you sign a one or two year contract. With companies like T-Mobile, customers can even get free T-Mobile phones if they sign a new contract. California law requires sales tax to be charged on the full purchase price of the phone before taxes.
Official documentation:
Other documentation:
Property Taxes
The California property tax rate is low — just 1% of the home's value. In addition, cities and counties have additional taxes. If you buy a new home in the Bay Area, your total property tax may be between 1.10% and 1.20% of the home's value. Then again, in parts of California (such as the Bay Area) home values are so high that the total property tax could still be higher than a similar home elsewhere in the country that has a higher property tax rate.
Many people don't know, but most of these additional taxes are not deductible because they are fixed costs (like an $85 per home parcel tax) and not based on the property value of the home. On rare occasions an additional tax will add to the cost basis of the home. All this is explained at the FTB's web page Understanding the Real Estate Tax Deduction.
In addition to low property taxes, proposition 13 passed in the 1978, keeps property taxes low. The base property tax (the 1% of the home's value tax) can increase by only 2% a year even if the property value is increasing by more. As a result, a person living in a $1,500,000 home for the last 30 years can pay a tax of only $1,800 a year because they bought that home long ago for about $100,000. But someone who just bought the home can expect to pay $15,000 a year! This is an extreme example, and while it does happen, most long-term residents save only a few thousand a year because of proposition 13. This is because most people change homes every 5 to 7 years.
Businesses also receive the benefits of proposition 13.