In California, state income taxes are generally among the highest in the country, but the burden is spread among different segments of the population. The rate of California income tax is arranged on something of a sliding scale, separated by income tax brackets. Low earners pay a smaller percentage of tax on their wages, while people who earn more pay higher rates. Understanding which bracket you fall into is the first step towards calculating how much income tax you owe the state.
The Franchise Tax Board
Also known as the FTB, the Franchise Tax Board is a state organization which administers many important programs for California. They are the body responsible for assessing and collecting California income tax, and their primary purpose is to administer the state’s Revenue and Tax Code.
Income tax in California: how is it calculated and collected?
If you are resident in California, or if you are a non-resident but do business in California, you are required to submit an income tax return if have earned over a certain threshold. The threshold is subject to change, but you can see a recent chart here.
Calculating your income tax can be done on your own or with the help of a professional service. The FTB offers an online tax calculator to make things easier. You need to know your filing status, which can be one of these five:
- Married/registered domestic partner filing jointly
- Married/registered domestic partner filing singly
- Head of household
- Qualifying widow(er)
You also need to know which form you will be using to file. There are three different forms, and which one you use will depends on the amount of your taxable income, your filing status, your residency status (resident full year or part time or nonresident). The three forms are:
- Form 540
- Form 540 2EZ
- Form 540 NR: Long or Short
You can find full details of which form you should choose on the FTB website. Once you’ve used the form to find your taxable income, simply enter it into the calculator to find out how much you owe. For many taxpayers, your state income taxes will be withheld from your paycheck, based on the withholding allowances you chose on Form DE4. If you filled out the form correctly, it is likely that when you file your income tax return, you will not owe additional taxes, and might even get a refund.
Understanding income tax brackets: what are your rates?
The progressive nature of California income tax means that the more you earn, the higher your rate of tax will be. The income tax rates are based on brackets, as follows:
- 1% on the first $7,850 of taxable income
- 2% on taxable income between $7,851 and $18,610.
- 4% on taxable income between $18,611 and $29,372.
- 6% on taxable income between $29,373 and $40,773.
- 8% on taxable income between $40,774 and $51,530.
- 9.3% on taxable income between $51,531 and $263,222.
- 10.3% on taxable income between $263,223 and 315,866.
- 11.3% on taxable income between $315,867 and $526,443.
- 12.3% on taxable income of $526,444 and above.
Those are the rate for taxpayers filing as single or married, filing separately. For married filing jointly, or head of household, the tax rates are the same, but the income thresholds are doubled. So, for example, a married couple filing jointly will pay 1% on the first $15,700 of their combined income. Also, these rates are based on your adjusted gross income: that is the amount of your income after all the applicable deductions and exemptions have been subtracted.
An important thing to remember is that when you “jump up” a tax bracket, you only pay the higher rate on the part of your income which falls into that bracket, which is why they are often referred to as “marginal” tax rates.
Filing your California income tax return
As we mentioned before, almost every resident in California must file an income tax return. There are many different ways to file your California state taxes online, starting with the FTB’s free online portal, CalFile. Even if your taxes are being withheld at the proper rate, and even if you expect a refund, you have to file or you could face a penalty. The deadline for filing your California income tax return is April 15. If you do not owe any tax or are owed a refund, you have an automatic 6 month extension until October 15. If you are non-military living or traveling abroad on tax day, you get another 2 month extension, making the final deadline December 15. Military personnel may qualify for additional extensions.
If you miss the deadline to file and ignore reminder notices from the FTB, you could face a Failure to File penalty of 5% of the tax due for every month that the return is late, up to a maximum of 25%. If they suspect fraud, the penalty jumps from 5% to 15% and from 25% to 75% respectively. The minimum penalty is the lesser of $135 or 100% of the tax required to be shown on the return.
Underpayment and penalties
If you underpay your California income tax, either through inadequate withholding or because you are self-employed and did not make the correct estimated payments, you will be charged an underpayment penalty. The penalty is 5% of the unpaid total, plus ½ of a percent every month that the tax remains unpaid, up to a total for 40 months, equaling a maximum penalty of 25%. Continued failure to pay can lead to stronger collection actions on the part of the FTB, which can be fairly aggressive about pursuing unpaid tax liabilities.
Dealing with income tax is probably not your favorite task, but it is an important one. In the big picture, federal and state income taxes fund public amenities and programs: roads, schools, and parks, along with police, fire, and healthcare services. On a more personal level, paying your income tax in full and on time is the best way to avoid headaches, stress, and unpleasant consequences from the FTB. If you are ever in doubt about your tax compliance or just want a professional opinion, it never hurts to check in with an experienced tax expert.