If You Live in California, What Are Your Tax Obligations?

California has a complex tax system that affects residents in multiple ways. From state income taxes to property levies and sales tax responsibilities, understanding what you owe can help you avoid penalties and take advantage of available deductions. The state’s high cost of living and progressive tax structure make it especially important to stay informed about potential liabilities and opportunities for savings.

Several factors determine your tax obligations, including where you live, what you earn, and what you own. Knowing these details ensures compliance with state laws while helping you minimize unnecessary costs.

Residency for State Income Taxes

California determines state income tax obligations based on residency status. The Franchise Tax Board (FTB) classifies individuals as residents, nonresidents, or part-year residents, each with different tax rules. Residents pay taxes on all income, regardless of where it is earned, while nonresidents are taxed only on California-sourced income. Part-year residents report all income earned while living in the state and any California-sourced income received while residing elsewhere.

Residency is based on factors such as where you spend most of your time, maintain a primary home, and establish financial and social ties. The FTB considers voter registration, vehicle registration, bank accounts, and even the location of doctors and gym memberships. If you spend more than nine months in California during a tax year, the state presumes you are a resident unless you prove otherwise.

Leaving California does not automatically end tax obligations. If you maintain significant ties—such as owning property, having family in the state, or frequently returning—the FTB may still consider you a resident. Disputes often arise when individuals claim to have moved but continue financial or personal connections in California. Failing to sever residency ties properly can result in unexpected tax liabilities.

Deductions and Credits for Residents

California offers various deductions and credits to reduce state income tax. Homeowners can deduct mortgage interest on loans up to $750,000 for a primary residence. Property tax payments may also be deductible, though the total deduction for state and local taxes, including income and property taxes, is capped at $10,000 under federal law.

For families, the state provides a Child and Dependent Care Credit to offset childcare costs for parents who work or attend school. The credit is based on income, with a maximum benefit of up to $1,050 for one child or $2,100 for two or more. The Young Child Tax Credit offers up to $1,117 for qualifying low-income families with children under six.

Retirement savings incentives include deductions for contributions to a 401(k) or traditional IRA, though California does not allow deductions for Health Savings Account (HSA) contributions. Pension income, Social Security benefits, and withdrawals from retirement accounts are subject to state income tax, with no exemptions for retirees.

Education-related deductions and credits provide relief for those paying tuition or repaying student loans. Contributions to a ScholarShare 529 plan are deductible, and withdrawals for qualified education expenses are not taxed. The Student Loan Interest Deduction is available but phases out at higher income levels.

Sales and Use Tax Accountability

California’s sales tax structure includes a statewide base rate of 7.25% as of 2024, with local jurisdictions adding district taxes that can bring the total rate to as much as 10.75%. The final amount paid on purchases varies by location. Businesses collect and remit these taxes, but consumers are responsible in certain cases, particularly for out-of-state or online purchases.

Use tax applies when taxable goods are purchased from an out-of-state seller who does not collect California sales tax. If a retailer does not charge the appropriate tax, residents must report and pay the use tax directly to the California Department of Tax and Fee Administration (CDTFA). This often applies to online purchases from smaller vendors, artwork bought from out-of-state galleries, or furniture shipped from another state. Failure to report use tax can result in penalties and interest, though enforcement is primarily focused on businesses.

Certain transactions qualify for exemptions or reduced rates. Groceries, prescription medications, and some medical devices are not subject to sales tax. Manufacturing equipment and certain agricultural products may qualify for partial exemptions. Vehicle and vessel purchases, including cars, boats, and aircraft, involve specific tax rules based on where the item is registered and how it is used. Purchasing a vehicle in Oregon, which has no sales tax, does not exempt a California resident from paying use tax when registering it in the state.

Real Estate Tax Obligations

California property owners must account for annual real estate taxes, primarily governed by Proposition 13. This law caps the general property tax rate at 1% of a property’s assessed value and limits annual increases in assessments to 2%, unless there is a change in ownership or new construction. While this provides stability for long-term homeowners, new buyers often face significantly higher tax bills due to reassessments at current market value.

Additional levies, such as Mello-Roos taxes, fund local infrastructure projects like schools and roads. These taxes vary by district and can add thousands of dollars annually. Supplemental property taxes may also arise when a reassessment occurs mid-year, requiring the new owner to pay the difference between the previous and updated assessed value.

Delinquent property tax payments incur a 10% penalty after the due date, with additional charges accruing if not paid by June 30 each year. If taxes remain unpaid for five years, the county can initiate a tax-defaulted property sale. Property tax postponement programs exist for qualifying seniors and disabled individuals, allowing them to defer payments, though interest accrues on deferred amounts.

Inheritance and Gift Tax Implications

California does not impose a state-level estate or inheritance tax, but federal estate tax laws apply to estates exceeding the federal exemption threshold of $13.61 million per individual in 2024. While heirs do not owe state taxes on inherited assets, estates above the federal limit may be taxed at rates up to 40%. Estate planning strategies, such as trusts and gifting, can help minimize federal tax liabilities.

Though California does not have a gift tax, residents must comply with federal gift tax regulations. The annual exclusion for tax-free gifts is $18,000 per recipient in 2024. Gifts exceeding this amount must be reported to the IRS via Form 709 and count toward the lifetime exemption, which is tied to the federal estate tax exemption. Certain transfers, such as direct payments for tuition or medical expenses, are excluded from gift tax calculations.

Additional Fees and Levies

Beyond income, sales, and property taxes, California imposes various other fees. These include vehicle registration fees, environmental surcharges, and business-related taxes that vary by industry and location.

The Department of Motor Vehicles (DMV) assesses annual vehicle registration fees based on factors such as the vehicle’s value, weight, and location. California also imposes a Vehicle License Fee (VLF) of 0.65% of the vehicle’s market value. Electric vehicle owners must pay an additional annual fee of $100 to offset lost gas tax revenue. Late registration renewals result in penalties that increase over time.

Business owners face additional tax obligations, including the annual $800 minimum franchise tax for LLCs, corporations, and certain partnerships operating in the state. Businesses with gross receipts exceeding $250,000 may owe additional fees, while corporations are subject to an 8.84% income tax rate or an alternative minimum tax of 6.65%, whichever is higher. Self-employed individuals and independent contractors must account for California’s self-employment tax, which includes state income tax and contributions to Social Security and Medicare.