California, also known as the Golden State. There are many wonderful things about California. We have fantastic weather, scenery, and boast some of the great industries in the country (agriculture, technology, and so on).
However, high taxes are not so wonderful. California is typically known as a bottom dweller as far as tax friendliness goes.
As many know, the top income tax rate in California is 13.3%. YIKES! That’s the top tax rate in the country. But how does this affect me? Is it really that bad?
Today, we are solely focusing on income tax. Discussing property tax, sales tax, new gas tax and so on will be discussed another day.
Each family’s taxes due are going to be different because it is based on your individual income (check out our previous post on tax brackets, it’s a good refresher). The 2016 California Income Tax Brackets look as follows:
Marginal Tax Rate | Married Filing Jointly |
1% | $0 – 16,030 |
2% | $16,030 - $38,002 |
4% | $38,002 - $59,978 |
6% | $59,978 - $83,258 |
8% | $83,258 - $105,224 |
9.3% | $105,224 - $537,500 |
10.3% | $537,500 - $644,998 |
11.3% | $644,998 - $1,074,996 |
12.3% | $1,074,996 and above |
Data Source: State of California Franchise Tax Board (FTB).
As we can see, couples making less than $100,000 are only in the 8% bracket. And yet, their total or effective rate is even LESS!
Specifically for people in retirement, there are a couple of things that help even more. One of the biggest tax reliefs for Californians is that Social Security is considered tax free. This is significant.
To give a little more insight into how much taxes a Californian may pay, I put together a quick hypothetical case study for you:
Let’s take a married couple making $100,000 ($30,000 from Social Security, and $70,000 from Ordinary Income). Let’s also assume that they are taking the standard deduction so we can be conservative. How much would their tax liability be?
In this circumstance, this couple would pay $1,363 in California Income Tax for their total earnings of $100,000, or 1.4%.
I couldn’t believe it either. I double and triple checked the math.
This tax rate increases significantly with additional income from here. Notice that the bracket that our study has followed is basically in brackets below 4%. All of those mixed together create a low overall tax bracket.
Looking at our financial plans, we must pay attention to situations that may put us in higher tax brackets. We, of course, are here to help with any of your questions.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax advice. SagePoint Financial nor its representatives offer tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Hypothetical example is for illustrative purposes and is not representative of any specific situation. Your results may vary.