California Tax Credits: What Can You Claim?

A California tax credit directly reduces the amount of state income tax you owe. This provides a dollar-for-dollar reduction of your tax liability, meaning a $500 credit cuts your tax bill by $500. This is different from a tax deduction, which only lowers your taxable income, resulting in a smaller overall tax benefit.

California’s tax system includes both refundable and nonrefundable credits. A nonrefundable credit can reduce your tax liability to zero, but you will not receive any of the remaining credit as a refund. In contrast, a refundable credit can result in a tax refund even if you do not owe any tax.

Common Tax Credits for Individuals and Families

The California Earned Income Tax Credit (CalEITC) is a refundable credit for low-to-moderate-income working individuals and families. Eligibility hinges on having earned income, and for the 2024 tax year, individuals with income up to $31,950 may qualify. The credit amount varies based on income and the number of qualifying children, with a maximum possible credit of $3,644.

Building on the CalEITC, the Young Child Tax Credit (YCTC) provides additional support for families with young children. To qualify for the YCTC, you must first be eligible for the CalEITC and have at least one qualifying child under the age of six. For the 2024 tax year, a change allows taxpayers to qualify even with a total earned income of zero or less, provided their wages do not exceed $34,602. This refundable credit can provide up to an additional $1,154.

For those who pay rent for their primary residence in California, the Nonrefundable Renter’s Credit offers tax relief. To be eligible, you must have rented property in California for at least half of the tax year and fall below certain income thresholds. The credit is a fixed amount and cannot be claimed if your income is too high or if you could have been claimed as a dependent by another taxpayer.

The Child and Dependent Care Expenses Credit helps offset the costs of care for a qualifying child or dependent while you work or look for work. This nonrefundable credit is a percentage of the amount you paid for care. For tax year 2024, you can claim expenses up to $3,000 for one qualifying individual and $6,000 for two or more. To qualify, you must have earned income and have provided the care in California.

Another credit aimed at education is the College Access Tax Credit. This credit is available to taxpayers who make a cash contribution to the College Access Tax Credit Fund. The fund is used to provide financial aid to low-income California students attending public and private universities in the state. The credit is equal to a specified percentage of the amount contributed.

Significant Tax Credits for California Businesses

California provides several tax credits to encourage business growth, investment, and specific hiring practices. For tax years 2024 through 2026, the total amount of business credits a taxpayer can use to reduce their tax liability is capped at $5 million annually.

• The New Employment Credit (NEC) incentivizes businesses in designated geographic areas to hire qualified full-time employees. To qualify, a business must hire an employee who meets certain criteria, such as being a former long-term unemployed individual. The credit is a percentage of the employee’s wages and is claimed over a five-year period.
• The Research and Development (R&D) Credit is available to businesses that incur qualified research expenses in California. This credit is calculated as a percentage of the increase in a company’s research spending over a base amount. For qualified in-house research expenses, businesses can receive a 15 percent credit, and for basic research payments, the credit is 24 percent.
• The California Competes Tax Credit (CCTC) is an application-based credit awarded by a committee. Businesses that want to relocate to California or expand their existing operations can apply. The committee evaluates applicants based on factors like the number of jobs created, the level of investment, and the overall economic impact.
• The Homeless Hiring Tax Credit provides an incentive for employers to hire individuals who are experiencing homelessness. The credit amount is based on the number of hours the employee works and can range from $2,500 to $10,000 per eligible employee.

Information and Forms Needed to Qualify

To claim California tax credits, you must complete specific forms and have the required documentation. Key forms and requirements include:

• Form FTB 3506, Child and Dependent Care Expenses Credit: Requires the care provider’s full name, address, and taxpayer identification number, plus the total amount you paid for care.
• Form FTB 3514, California Earned Income Tax Credit: Used for both the CalEITC and the Young Child Tax Credit. You will need valid Social Security Numbers or ITINs for yourself, your spouse, and any qualifying children, along with income documentation like W-2s.
• Form FTB 3554, New Employment Credit: Requires thorough documentation for each qualified employee, including proof of eligibility, work location, hours worked, and wages paid.
• Form FTB 3523, Research Credit: Requires meticulous record-keeping of all qualified research expenses, including wages, supply costs, and payments to third-party research organizations.

How to Claim Credits on Your State Tax Return

After completing the specific forms for any credits, attach them to your main California tax return. For individuals, this is Form 540, California Resident Income Tax Return. Businesses use forms such as Form 100 for C corporations or Form 100S for S corporations.

When e-filing, tax software will prompt you to enter the credit information and will attach the appropriate forms to your submission. If filing by mail, you must physically attach the completed credit forms to your tax return.

The Franchise Tax Board (FTB) will process your return and apply the credits, which will reduce the amount you owe or increase your refund. It is important to keep all supporting documentation for at least four years after filing, as the FTB may request it to verify your eligibility for the credits.