What California Tax Credits Can You Claim?
Understand the framework of California's tax credits for individuals and businesses to identify opportunities for reducing your annual state tax liability.
A California tax credit provides a dollar-for-dollar reduction of your state income tax liability. The state offers these credits to encourage certain economic activities, such as specific business investments or hiring practices. They are also used to provide financial relief to taxpayers in particular situations, including those with low-to-moderate incomes, families with children, or individuals paying for education or adoption expenses.
Understanding Credit Types
The most common type is the nonrefundable credit. This credit can reduce the tax you owe, but only down to zero, and you do not receive the excess amount as a refund. For example, if you owe $400 in state taxes and qualify for a $600 nonrefundable credit, your tax liability is reduced to zero, but you forfeit the remaining $200.
A refundable credit can result in a tax refund even if you do not owe any taxes. If your tax liability is zero and you qualify for a $1,000 refundable credit, the state will send you a check for the full $1,000. If you owe $300 in taxes and qualify for the same credit, your tax bill is eliminated, and you will receive the remaining $700 as a refund.
Some credits include a carryover provision, which allows you to apply any unused portion of the credit to subsequent tax years. For instance, if you have a $2,000 credit but can only use $1,200 in the current year, you can carry the remaining $800 forward. The duration of this carryover period varies depending on the specific credit.
Major Tax Credits for Individuals and Families
The California Earned Income Tax Credit (CalEITC) is a refundable credit for working residents with low-to-moderate incomes. For the 2024 tax year, you must have earned no more than $31,950. The credit amount varies by income and number of qualifying children, with a 2024 maximum of $3,644. You must have a valid Social Security Number or ITIN and live in California for more than half the year.
The Young Child Tax Credit (YCTC) offers more support to families with young children. To be eligible, you must qualify for the CalEITC and have a qualifying child under age six. You may qualify even with no earned income if you meet all other CalEITC requirements. For 2024, the YCTC provides an additional credit up to $1,154.
The nonrefundable Renter’s Credit is for individuals who rent their primary California residence for at least half the tax year. Eligibility is subject to income limitations based on your filing status.
The Child and Dependent Care Expenses Credit is a nonrefundable credit based on a percentage of the federal credit. To qualify, you must have paid for care in California for a qualifying individual so you could work, and your federal AGI must be $100,000 or less. Expenses are capped at $3,000 for one individual and $6,000 for two or more.
Key Tax Credits for Businesses
The New Employment Credit (NEC) is for businesses in designated geographic areas that hire qualified full-time employees. The business must pay wages exceeding the minimum wage, and the employee must meet criteria related to long-term unemployment or a disadvantaged background. The credit is a percentage of qualified wages paid during the employee’s first five years.
The Research and Development (R&D) Credit allows companies to recoup a portion of their expenses for qualified research activities in California. Qualified expenses include wages for research employees, costs of supplies, and payments for contract research. The credit is calculated as a percentage of current year research expenditures over a base amount.
The California Competes Tax Credit (CCTC) is an application-based credit for businesses relocating to or expanding in the state. The CCTC Committee evaluates applications based on factors like the number and compensation of jobs created, the amount of business investment, and the business’s strategic importance to the state’s economy.
Required Documentation and Forms
To claim credits, you must attach specific Franchise Tax Board (FTB) forms to your return. For the CalEITC, you must complete Form FTB 3514, which requires information on your income and qualifying children. For the Child and Dependent Care Expenses Credit, you will need Form FTB 3506, which requires details about the care provider.
Businesses also have distinct forms. To claim the R&D credit, businesses must file Form FTB 3523, which requires a detailed calculation of qualified research expenses. For the New Employment Credit, businesses use Form FTB 3554, which requires information about the qualified employee and their wages.
You must also maintain thorough documentation to prove eligibility. For the Renter’s Credit, keep records of rent payments and landlord contact information. For the Child and Dependent Care Expenses Credit, you must have receipts and the provider’s taxpayer identification number. Businesses claiming the NEC need payroll records, while those claiming the R&D credit need detailed project and expense records.
How to Claim Your Credits
To claim your credits, attach the completed forms to your primary California tax form, such as Form 540 for individuals or Form 100 for corporations. The total amount of your claimed credits will be used to calculate your final tax liability or refund. You must keep copies of all submitted forms and supporting documentation, as the FTB may request these records later to verify your eligibility.