California Income Tax Differences

California Income Tax Differences

While filing income taxes is, unfortunately, a universal necessity, each state has its own quirks and nuances that make the process different from state to state. It’s important for residents of California who are beginning to prepare their 2011 return to know the income tax differences in California. The differences below list some of the most important things Californians need to know when filing their tax return.

-Several important income streams are exempt from being taxed in California, such as unemployment compensation, state lottery winnings, refunds from state income tax, money distributed via a HSA (health savings account) and interest derived from federal bonds. In addition, through 2012, California homeowners are allowed to exclude as much as $250,000 in a single filing or $500,000 in a joint filing of cancelled debt from a home sale (typically a short sale or foreclosure).

-Two California income tax differences to pay particular attention to are railroad retirement and social security benefits, which are exempt from state income tax filings. Every other type of federal, local, state and private pension must be accounted for in a California income tax filing. In addition, any paid maternity or family leave is exempt from California income tax, but must be taxed on your federal return.

-Conversely, some items that are subject to income tax filings in California do not need to be represented on your federal tax return. For instance, any foreign-earned income must be accounted for on a California income tax return, as well as interest from out-of-state municipal bonds. And if you sold a car via “Cash For Clunkers” and received a rebate that was more than the cost of the car, that rebate needs to be addressed on your state income tax filing.

-California income tax differences also include multiple tax credits exclusive to the “Golden State.” A single renter with an income of $34,412 or less can receive a $60 credit. A couple that rents and has an income of less than $68,824 is eligible for a $120 credit. Did you adopt a child this year? If so, half of the qualified costs can be credited this year only. The head of a family is also eligible to receive a $98 “exemption credit” for him or herself as well as his or her spouse and dependents. Senior citizens who are older than 65 or blind can also claim an additional $98 credit.

-Income tax differences in California also include the income tax rates. These range anywhere from 1.25 percent to 9.55 percent. They are levied on the California-based income earned by non-residents as well as the income of California residents. In addition, residents that have an income of more than $1 million are charged a mental health surcharge.

There are additional California income tax differences that your accountant can discuss with you in meetings leading up to your filing this spring. You and your accountant should go over your return and be doubly careful that all income tax differences in California have been considered. For Californians filing in the state for the first time, don’t worry-the California income tax differences will be easier to remember in future years!