1. Overview of California State Income Tax
The California state personal income tax is levied on individuals that are residents of California as well as nonresidents of California.
California residents are taxed on their worldwide income while nonresidents are taxed only on income earned in California (such as wage income from work days in California).
California taxable income is computed in a similar manner as federal taxable income with a variety of differences. Generally, California tax law follows federal tax law as far as items of income that are taxable and deductions that are allowed.
California imposes tax at graduated rates between 1% and 9.3%.California tax returns are due the 15th day of the 4th month following the tax year. A 6 month extension for filing the California return may be requested by filing Form 3519 or California will accept a copy of the federal extension for filing (Form 4868).
A California resident includes:
- An individual who is in California for other than a temporary or transitory purpose, or
- An individual domiciled in California.
Also, spending more than 9 months in California during the tax year creates a presumption of residence. The presumption can be overcome by showing that the stay in California is for a temporary or transitory purpose.
Domicile is the place where the taxpayer has a permanent home. It is the place where the taxpayer intends to return if they are living or working temporarily in another state or country.
There is a special exception for employment related absences from California. If an individual domiciled in California is absent from California for an uninterrupted period of at least 546 consecutive days under an employment related contract is considered nonresident of California. This rule also applies to spouses accompanying the taxpayer on the assignment. Note that returning for not more than 45 days during a taxable year will not affect the nonresident status of the taxpayer or spouse.
If an individual is resident in California, the individual is subject to California income tax on all worldwide income earned during the period of California residency.
Residency is determined separately for each person. It is possible that one spouse can be resident in California while the other is not. Generally, your filing status for California tax purposes must be the same as for federal tax purposes. However, if your spouse was not a California resident and had no California source income, then you must file a married filing separate tax return. Spouses may be resident in California for different portions of the tax year (such as in the case of a trailing spouse during a relocation).
3. Treatment of Part-year Residents
Part-year residents are generally taxed in California on their worldwide income for the part of the year in which they are resident. A part-year resident must first determine their California tax based on their full year taxable income (computed according to California rules). Then, California tax is prorated based on the percentage of California income to full-year worldwide income. This methodology is different than most states and may have the affect of taxing part-year residents at higher tax rates.
4. Avoiding Double State Taxation
California allows resident and part-year resident taxpayers to claim a credit for taxes paid to another state on income that is subject to both California income tax and income tax in the other state. The amount of the credit is the lesser of the income tax paid to the other state or the California income tax that is due on the double-taxed income. This might be the case if you are domiciled in California, but work in another state.
A California resident may not claim a credit for taxes paid to Arizona, Indiana, Oregon, or Virginia taxes paid. However, these states allow you to claim a tax credit for California taxes on their nonresident tax returns so that double taxation is avoided.
Also, note that if you are a Arizona, Indiana, Oregon, or Virginia resident with California source income, you can claim a credit on your California nonresident tax return for the taxes paid on the California source income that is also taxed in those states so that double taxation is avoided.
5. Home Sale Treatment
California follows the federal law for taxing the gain on the sale of a principal residence. Further, any loss on the sale of a principal residence is not deductible (the same as federal purposes).
6. Moving Expense Treatment
California follows the federal rules for deducting moving expenses with one exception. In order for moving expenses to be deductible in California, the moving expenses must be related to a move to California or a move within California.
7. Allowable Deductions
California provides for a standard deduction as well as personal exemptions to reduce taxable income. In addition, California allows for taxpayers to itemize their deductions rather than claiming the standard deduction. California itemized deductions are similar to federal itemized deductions except no deduction is allowed for state income taxes paid.
8. Special Rules for U.S. Expatriates
California accepts the automatic federal extension until June 15th for U.S. persons that are outside the country on April 15th.
California does not allow the foreign earned income and housing exclusions that may be claimed for federal tax purposes.
California does not allow a credit for income taxes paid to other countries.
9. Special Rules for Visa Holders Living or Working in California
It is possible for a foreign national to claim nonresident status in California for an extended period of time if their domicile is not in California and they are in California for temporary or transitory purposes. This might be advantageous if the foreign national has significant foreign investments that would be subject to California tax as a California resident.
10. Where to get California State Income Tax Information and Forms
The California Franchise Tax Board's web site is an excellent source of information including forms and filing instructions at www.ftb.ca.gov
If you are a California full-year resident, you will need to file Form 540.
If you are a part-year or nonresident of California, you will need to file a Form 540NR