It is no secret that it is expensive to live in California. Despite the beautiful weather, expansive beaches, and breathtaking views, you will pay a pretty penny on a home, food, and even taxes. Before making any moves out west, it’s important to understand California’s cost of living and, maybe, more importantly, it’s tax system to ensure you can actually afford it.
While no one particularly enjoys paying taxes, many of us benefit from how our tax dollars are used. While state and local officials make the final decisions, most money received goes to:
- K-12 Education – On average, a quarter of the spending goes toward public education. Grants are provided to school districts, or the city or county, and these then distribute funds to individual schools.
- Higher Education – About thirteen percent of state spending goes to community colleges, universities, and vocational schools.
- Healthcare – Another large portion of a state’s budget goes to support the healthcare of low-income families through Medicaid and CHIP, or the Children’s Health Insurance Program.
- Transportation – Money allocated for this will fund repairs and new roads and bridges, as well as public transportation.
- Corrections – This includes juvenile programs, prisons, and even parolees and constitutes about 4% of a state’s budget.
- Assistance for Underprivileged Families – This is usually around one percent and is money paid to low-income individuals with the TANF (Temporary Assistance for Needy Families) program.
- Other spending – Much of the remaining budget goes towards public employee salaries, pensions, and health benefits.
While virtually every state has sales taxes, California has a sales tax rate of 7.25%, which is not bad when compared with the rest of the country. However, counties and cities can tack onto that state sales tax rate, as much as 2.5% making some local rates as high as 10.25% and well above average. The average rate amongst California cities tops out at about 8.56%.
While food, prescription drugs, and some alternative energy equipment are exempt from this, tariffs collected from sales are used to support almost half of California’s general fund. This includes paying off Economic Recovery Bonds, supporting local criminal justice, healthcare, and social service programs. Additionally, they pay for the operations of cities and counties and the funds of county transportation.
Additional State Excises Taxes
Much like other states, California also adds tax to certain products, especially those deemed “unhealthy” by the state. These include cigarettes, gas, alcohol, and even items out of a vending machine. For cigarettes, expect to pay an additional $2, while gas will cost an extra 12 cents per gallon, making it almost a dollar more than the national average. Items like candy and soda are still labeled as food which is not taxed in California.
If sales tax has you down, take heart in knowing that those on properties are not quite as bad. In fact, these rank the 35th lowest in the entire country. Properties are assessed at 100% of the full cash price, or fair market value and the maximum tax on real estate is limited to 1% of this amount. Furthermore, rates can’t increase more than 2% over the previous year and there are no intangible personal property taxes levied here.
California also offers a homestead program that allows those that are living in their homes as their primary residence to qualify for a $7,000 reduction in the taxable value of their property. This state also offers a postponement program for senior citizens, the blind, and the disabled. Individuals in these populations may actually postpone their property taxes for their primary residence if needed.
While this all seems quite positive in regards to owning a home, the downside is that properties are extremely expensive. Many individuals can’t even afford to own a home to take advantage of lower property taxes and are forced to rent instead.
Like most places, state income tax in California is based on income, with those making more paying more. Rates range anywhere from 1-12.3% with an additional 1% for those who make more than $1 million a year under the Mental Health Services Tax. While having the highest income tax rates in the country, California does allow for a standard deduction of $4,537 per person.
Furthermore, non-residents are also required to pay tariffs to California, and there are no reciprocity agreements. This means that non-residents working here are still on the hook to pay taxes to their home state.
Unfortunately, many federal deductions are limited or not allowed here as well; but, there are some state credits available. These include exemptions for oneself and dependents, for renters, for single and divorced parents, and for those with dependent parents.
If you are looking to avoid being taxed on capital gains, then you may want to avoid California, also. If you end up paying state and federal long-term capital gain taxes, you will be paying at the second highest rate in the world at 33.3%!
This state does not provide any breaks for long-term gains on the assets that you keep for over a year. This means that selling property or your assets for more than what you invested into them, you will pay taxes on your profit at your personal income tax rate. Even if you were to move away, you could still be on the hook for paying capital gains to the government, up to eighteen months post-move.
Estate and Inheritance
One area Californians can breathe a sigh of relief in is in their estate and inheritance taxes. Officials have eliminated their estate taxes and there are no inheritance taxes. For those who passed away on or after January 1, 2005, families are no longer required to file a California estate tax return.
Consult a Professional
Despite the taxes, living in California can be an amazing experience. If considering a move, or if currently living here, it is always a good idea to consult a personal finance professional to discuss these and how to make better financial decisions. Being knowledgeable about taxes and how they impact your personal budget will not only make you aware of what you are spending but help you plan better for the future. Contact us today.