What Is Not Taxed in California? Income, Sales & Property

California’s complex tax system includes various exemptions designed to reduce the tax burden. Understanding these exemptions is important, as not all income, transactions, or property holdings are taxed. These rules can significantly impact financial planning for residents and businesses.

California Income Tax Exemptions

California’s progressive income tax system applies to most income, but several categories are exempt. Certain government benefits, such as welfare and Social Security for lower-income individuals, are excluded from taxable income.

Specific compensation and payments also receive favorable tax treatment. Military pay for service members stationed outside California or in a combat zone is exempt from state income tax. As of June 2025, a partial income tax exemption for military retirement pay and Survivor Benefit Plan (SBP) payments allows up to $20,000 annually to be excluded for eligible veterans and surviving spouses. This exemption applies to individuals with incomes up to $125,000, or $250,000 for joint filers, and is set to sunset before the 2030 tax year.

Qualified foster care payments are exempt from state income tax. Additionally, interest income from certain California state and local government bonds is also exempt.

Educational benefits and scholarships can also be untaxed if they are used for qualified educational expenses, such as tuition and fees. This exemption encourages educational pursuits by reducing the financial impact of higher education.

California Sales and Use Tax Exemptions

California imposes sales and use tax on the sale or use of tangible personal property, but various exemptions exist. A significant exemption applies to most food products purchased for home consumption. This broad exemption aims to alleviate the tax burden on basic necessities.

Prescription medicines are exempt from sales and use tax when sold or furnished by prescription from a pharmacist, physician, dentist, or health facility. This exemption extends to sales of medicines to licensed medical professionals for patient treatment. Certain medical devices, such as prosthetics, durable medical equipment, and medical oxygen, are also exempt, particularly when sold on a written order from an individual. Recent executive orders have expanded this to include certain protective medical supplies.

While most tangible goods are taxed, services are generally not subject to California sales tax unless they are considered an integral part of a taxable sale of tangible personal property. For example, calibration fees for machinery might be taxable if tied to the sale of the equipment. Fabrication, which involves labor in creating tangible personal property, is also a taxable service.

Exemptions also apply to certain agricultural products, particularly those sold for immediate consumption or for use in producing other agricultural products. Sales for resale are also exempt, as the tax is applied at the point of the final retail sale. Additionally, California offers a partial exemption on certain manufacturing and research and development equipment purchases. This partial exemption reduces the state sales tax rate on qualified purchases, often for equipment valued at $5,000 or more, used primarily in manufacturing or R&D activities by businesses falling under specific NAICS codes. This exemption applies until June 30, 2030, with the tax reduced to a 3.9375% rate on qualified purchases or leases up to $200 million per calendar year.

California Property Tax Exemptions

California property owners may qualify for several exemptions that reduce their annual property tax liability. The Homeowners’ Exemption is a common benefit providing a $7,000 reduction in a property’s assessed value for owner-occupied principal residences. This exemption, authorized by the California Constitution, typically translates to an annual savings of approximately $70 to $80 in property taxes, given the approximate 1% statewide property tax rate. To qualify, the owner must occupy the dwelling as their principal residence as of January 1st each year, and a one-time filing with the county assessor is generally required.

Disabled Veterans’ Exemptions also offer substantial relief. Qualified veterans who are 100% disabled due to a service-connected injury or disease, or are compensated at the 100% rate due to unemployability, may receive a property tax exemption on their primary residence. An unmarried surviving spouse of a qualified veteran may also claim this exemption. There are two levels: a basic exemption, which was $175,298 in assessed value in 2025, and a low-income exemption of up to $262,950 for veterans whose annual household income does not exceed a specified limit, which was $78,718 in 2025. The basic exemption typically requires a one-time filing, while the low-income exemption requires annual filing to verify income eligibility.

Property owned and used by certain non-profit organizations for religious, hospital, scientific, or charitable purposes may be eligible for the Welfare Exemption. This exemption requires that the property be used exclusively for these qualifying purposes. Educational institutions may also qualify under certain charitable provisions.

Organizations seeking this exemption must meet specific criteria, often including obtaining an Organizational Clearance Certificate from the California State Board of Equalization and filing with the county assessor. Separate exemptions, such as the Church Exemption and Religious Exemption, specifically apply to property used for religious worship services and related activities. These exemptions highlight California’s policy to support various public benefit activities through property tax relief.