California Itemized Deductions: What You Need to Know

California taxpayers can reduce their taxable income through itemized deductions, a significant aspect of personal finance for residents. Understanding these deductions can lower tax liabilities and improve financial outcomes.

Major Categories of Eligible Expenses

California’s tax code allows residents to tailor their tax filings by utilizing various itemized deductions. Knowing these categories is essential for optimizing deductions and minimizing tax burdens.

Medical Expenses

Medical expenses can be a major deduction for residents with substantial healthcare costs. To qualify, expenses must exceed 7.5% of the taxpayer’s adjusted gross income (AGI). Eligible expenses include payments for medical and dental care, prescription medications, and certain long-term care services. For example, if a taxpayer’s AGI is $50,000, only the medical expenses exceeding $3,750 are deductible. Detailed records, such as receipts and statements, are necessary to support claims. Only unreimbursed expenses qualify, including those for dependents, while costs covered by insurance or employer-provided plans do not.

Mortgage Interest and Property Taxes

Homeownership offers key itemized deductions, primarily through mortgage interest and property taxes. California taxpayers can deduct interest on mortgage debt up to $750,000 for homes purchased after December 15, 2017, aligning with federal standards under the Tax Cuts and Jobs Act (TCJA). Property tax deductions are capped at $10,000, including state and local taxes. It’s important to distinguish between taxes on personal properties and those on rental or investment properties, which may have different tax treatments. Proper documentation, such as Form 1098 from lenders, ensures accurate reporting.

Charitable Contributions

Charitable contributions are another means of reducing taxable income. Deductions apply to donations made to IRS-qualified organizations under Section 501(c)(3). Taxpayers can deduct cash contributions up to 60% of their AGI, while non-cash donations are capped at 30% of AGI. Accurate valuation of donated goods is critical, and contributions over $250 require receipts. Non-cash donations exceeding $500 necessitate completing Form 8283. Maintaining records such as acknowledgment letters and appraisals for high-value items is essential.

Miscellaneous Deductions

Miscellaneous deductions include less common expenses that qualify for itemization. In California, taxpayers can still deduct unreimbursed employee expenses, such as travel and uniforms, if they exceed 2% of AGI. Other eligible expenses include tax preparation fees and certain investment-related costs. Each type of deduction has specific eligibility criteria, and only the portion exceeding the AGI threshold is deductible. Since many miscellaneous deductions have been eliminated federally, it’s important to examine state-specific regulations carefully.

Income-Related Adjustments

Income-related adjustments play a key role in optimizing tax liabilities. One notable adjustment is the treatment of retirement contributions. California follows federal limits on contributions to 401(k) and IRA accounts, allowing taxpayers to reduce taxable income by the amounts contributed, subject to annual caps. For 2024, the contribution limit is $23,000 for individuals aged 50 and older and $19,500 for younger contributors.

Another adjustment involves educational expenses. California allows taxpayers to deduct qualified tuition and fees from taxable income, consistent with federal guidelines under Section 222. For 2024, the maximum deduction is $4,000, subject to income thresholds and filing status. Taxpayers should keep records of tuition statements and enrollment verifications to substantiate claims.

Key Differences from Federal Deductions

California’s tax system differs from federal standards in several ways. A significant distinction is in the treatment of state and local tax (SALT) deductions. While the federal SALT deduction is capped at $10,000, California does not impose this limit, enabling taxpayers to deduct a higher amount. Additionally, the state does not allow deductions for mortgage insurance premiums, which are deductible federally under certain conditions.

Another key difference involves capital gains and losses. California taxes long-term capital gains as ordinary income, unlike the federal system, which offers preferential rates. This can result in a higher tax burden for California residents on investment income. Additionally, the state does not permit deductions for losses from passive activities in the same manner as federal rules.

Documentation and Filing Requirements

Filing for California itemized deductions requires careful documentation to ensure compliance. Taxpayers should gather comprehensive records, including receipts, bank statements, and official forms like W-2s or 1099s. Organized record-keeping throughout the year simplifies the verification process and minimizes errors.

Filing requires familiarity with specific forms and schedules. Schedule CA (540) is crucial for adjusting federal itemized deductions to align with California’s rules. Accuracy in these entries is essential to avoid audits or penalties.