What Are the California Tax Changes for 2024?

California’s tax laws are revised annually due to new legislation, inflation-based adjustments, and state budgetary decisions. These yearly updates are often necessary because of the state’s dynamic economy and evolving priorities. For residents and business owners, staying informed about these modifications is important for financial planning. This article details the key tax changes effective for the 2024 tax year.

Individual Income Tax Modifications

For the 2024 tax year, California’s personal income tax structure continues its progressive system, with nine tax brackets adjusted for inflation. The rates begin at 1% for the lowest income earners and increase to a top rate of 12.3%. An additional 1% mental health services tax applies to taxable incomes over $1 million, maintaining the highest marginal rate at 13.3%. For single filers and those married filing separately, the 1% bracket applies to taxable income up to $10,756, while the 12.3% rate applies to income over $721,314.

The state has also adjusted its standard deduction amounts for inflation. For the 2024 tax year, single filers and married individuals filing separate returns can claim a standard deduction of $5,540. Married couples filing jointly, qualifying surviving spouses, and heads of household are entitled to a standard deduction of $11,080.

Several state-level tax credits have been updated for 2024, offering targeted relief to specific populations. The California Earned Income Tax Credit (CalEITC), a refundable credit for low-to-moderate income working individuals and families, is available to those with earned income up to $31,950. Depending on income and the number of qualifying dependents, the CalEITC can be worth up to $3,644 for the 2024 tax year.

Building on the CalEITC, the Young Child Tax Credit (YCTC) provides additional support. Taxpayers who qualify for the CalEITC and have a qualifying child under the age of six may be eligible for the YCTC. For the 2024 tax year, this refundable credit can provide up to an additional $1,154 per tax return. Another credit, the Foster Youth Tax Credit, offers up to $1,154 for former foster youth who meet specific age and income requirements.

Business Tax Law Adjustments

In response to budget deficits, California has enacted significant tax law adjustments affecting businesses for tax years 2024 through 2026. A key change is the temporary suspension of the Net Operating Loss (NOL) deduction for both corporate and individual taxpayers with business income. This suspension applies to taxpayers with a net business income or modified adjusted gross income of $1 million or more. To compensate for this, the carryover period for any NOLs affected by this suspension will be extended for up to three years.

Concurrent with the NOL suspension, the state has placed a temporary limitation on the use of most business tax credits. For tax years 2024, 2025, and 2026, a business may only use a total of $5 million in credits to offset its tax liability for the year. This cap applies to the aggregate credits claimed by a combined reporting group and includes popular incentives like the Research and Development (R&D) credit. The carryover period for any credits that are disallowed due to this $5 million annual limitation will be extended by the number of years the credit could not be used.

The state did not conform to the 100% bonus depreciation allowed under the federal Tax Cuts and Jobs Act. This means businesses cannot take the same accelerated depreciation deductions on their California returns as they can on their federal returns, a distinction that has a significant impact on calculating state taxable income.

The Pass-Through Entity (PTE) elective tax remains an option for qualifying partnerships and S corporations, allowing them to pay state tax at the entity level on behalf of their owners. This serves as a workaround to the federal $10,000 State and Local Tax (SALT) deduction limitation for individuals. The PTE elective tax credit is specifically excluded from the temporary $5 million business credit limitation, ensuring its benefit remains fully available.

Payroll Tax Revisions

A substantial change in California’s payroll tax landscape took effect on January 1, 2024, directly impacting the State Disability Insurance (SDI) program. The prior wage ceiling, which limited the amount of employee earnings subject to the SDI tax, has been completely removed. Previously, in 2023, the SDI tax applied only to wages up to $153,164.

This revision has the most significant consequence for high-income employees. Workers earning more than the previous wage cap will see a larger portion of their paycheck allocated to SDI contributions throughout the entire year, rather than ceasing once the former limit was reached. The SDI tax rate is set at 1.2% of wages for 2025.

The SDI program provides short-term disability and Paid Family Leave (PFL) benefits to eligible workers. While the SDI rate itself is subject to annual review and potential adjustment by the Employment Development Department (EDD), the structural change of removing the wage base is a permanent feature of the program moving forward.

Employers must ensure their payroll systems are correctly configured to handle this change, accurately calculating and withholding the 1.2% SDI tax for 2025 on all employee wages without applying any ceiling. This change does not affect other payroll taxes like unemployment insurance, which continues to have its own distinct wage base.

Sales Use and Miscellaneous Tax Updates

Effective July 1, 2024, a new statewide excise tax is imposed on retailers of firearms and ammunition. As enacted by Assembly Bill 28, this law places an 11% tax on the gross receipts from the retail sale of firearms, firearm precursor parts, and ammunition. This tax is levied on licensed firearms dealers, manufacturers, and ammunition vendors and is in addition to any applicable federal excise taxes and state and local sales taxes. Revenue generated from this tax is directed to the Gun Violence Prevention and School Safety Fund.

While the statewide base sales tax rate of 7.25% remains unchanged, it is important for consumers and businesses to recognize that total sales tax rates vary significantly across California. Many cities, counties, and special districts impose their own local sales and use taxes, known as district taxes. These rates can change throughout the year, affecting the final price of goods and the amount of tax businesses must collect and remit.