How to pay less taxes in California - Your ultimate tax saving guide

California state and local taxes can be rather tricky, which is why many find it difficult to learn how to pay less taxes in California. Anyone who has taxable income will have to pay California tax between 1% and 13.30%, depending on the tax bracket.

Filing status and adjusted gross income determine how much tax you must pay. When the income tax seems too high, there are still several strategies to reduce it.

Learn how to work with tax bill deductions to receive refundable tax credits. Read on for effective tips.

Note: If you are self-employed, a sure-fire way to pay less taxes in California is to reduce your business expenses. Bonsai Tax can help. Our software will scan your bank/credit card receipts to discover potential tax write-offs and help you maximize your tax savings. In fact, users typically save $5,600. Try a 7-day free trial today.

How much do Californians pay in taxes?

In California, the state tax rate ranges between 1% and 13.30% as of 2024. It depends on taxable income and filing status. Residency status also determines whether you owe taxes.

Use our California 1099 tax calculator to estimate your tax liability.

Marital status influences how much tax you pay or can deduct. Property taxes may also add to your payment. Calculate your taxes thoroughly based on income and assets to determine your tax bracket.

California income tax rates and brackets for 2025

Understanding California’s 2025 income tax brackets

California’s income tax rates for 2025 range from 1% to 13.3%, making it one of the highest state income tax rates in the country. The brackets are progressive, meaning higher income levels are taxed at higher rates. For example, single filers pay 1% on income up to $10,099, but income over $677,275 is taxed at the top rate of 13.3%.

For freelancers and small business owners, knowing where your income falls in these brackets helps you plan tax-saving strategies. Married couples filing jointly face slightly different brackets, with the top rate kicking in at $1,354,550. These differences affect how much tax you owe and which deductions or credits might be most beneficial.

Keeping track of your income relative to these brackets throughout the year allows you to adjust estimated tax payments and explore options like retirement contributions or business expenses to reduce taxable income. This proactive approach can lower your overall tax burden.

How to use tax brackets to reduce your California tax bill

Tax brackets determine the rate applied to each portion of your income, so reducing taxable income in higher brackets can save you more money. For instance, contributing to a SEP IRA or Solo 401(k) can lower your taxable income, potentially moving you into a lower bracket. In 2025, you can contribute up to $66,000 to a Solo 401(k) if self-employed, which directly reduces your taxable income.

Another strategy is to time your income and expenses. If you expect to earn more this year, accelerating deductible expenses like business supplies or equipment purchases before year-end can reduce taxable income. Conversely, deferring income to the next year might keep you in a lower bracket this year.

Using tax software like TurboTax or professional services familiar with California tax law can help you model these scenarios. Understanding how each bracket impacts your tax rate allows you to make informed decisions that minimize taxes legally and efficiently.

State-specific considerations for freelancers and small businesses

California has additional tax considerations beyond income tax brackets that affect freelancers and small business owners. For example, the state imposes a 1.5% mental health services tax on income exceeding $1 million. This can increase your effective tax rate if your business is highly profitable.

Moreover, California does not allow a standard deduction for business income, so tracking all eligible business expenses is critical. Using accounting tools like QuickBooks or Bonsai’s expense tracking features helps ensure you capture every deduction, reducing your taxable income within the brackets.

Finally, some cities in California impose local taxes or fees that affect your overall tax burden. Staying informed about both state and local tax rules ensures you don’t miss opportunities to reduce taxes. Regularly reviewing your tax situation with a CPA familiar with California laws is a smart step for maximizing savings.

Tax treatment of retirement, pensions, and Social Security benefits in California

How California taxes retirement and pension income

California does not tax Social Security benefits, but it does tax most other retirement and pension income as regular income. Distributions from 401(k)s, IRAs, and pensions are included in your state taxable income. This means that if you withdraw $50,000 from a 401(k) in 2024, that amount is subject to California's income tax rates, which range from 1% to 13.3% depending on your total income.

However, California offers some relief through the Senior Exemption and the Renter's Credit if you qualify, which can reduce your overall tax burden. For example, taxpayers aged 65 or older may claim a property tax exemption that indirectly lowers taxes, but this does not reduce income tax on retirement distributions. Understanding these nuances helps you plan withdrawals strategically to avoid pushing yourself into higher tax brackets.

To pay less taxes on retirement income in California, consider timing your withdrawals to stay within lower tax brackets or converting traditional IRAs to Roth IRAs during lower-income years. Using tax software like TurboTax or consulting a tax advisor can help you model these scenarios effectively for 2024 and beyond.

Why Social Security benefits are not taxed in California

California is one of the few states that does not tax Social Security benefits at all. This means that no matter how much you receive from Social Security in 2024, you won't pay state income tax on this income. This is a significant advantage for retirees living in California compared to states that tax these benefits.

While Social Security benefits may be taxable on your federal return if your combined income exceeds certain thresholds, California excludes them entirely from state taxable income. For example, if your combined income is $40,000 and $20,000 of that is Social Security, only the $20,000 from other sources is subject to California income tax.

To maximize tax savings, consider coordinating your Social Security benefits with other retirement income. Delaying Social Security to increase monthly payments while managing withdrawals from taxable accounts can reduce your overall tax liability in California.

Strategies to reduce taxable retirement income in California

One effective way to pay less taxes in California is to minimize taxable retirement income through strategic withdrawals and tax-advantaged accounts. For example, contributing to a Roth IRA allows you to withdraw funds tax-free in retirement, reducing your California taxable income.

Another strategy is to use California's standard deduction and itemized deductions wisely. In 2024, the standard deduction for single filers is $5,202, and for married filing jointly, it is $10,404. If your itemized deductions, such as:

• Mortgage interest
• Medical expenses
• State and local taxes
• Charitable contributions

exceed these amounts, you can lower your taxable income further.

Finally, consider charitable contributions from your retirement accounts. Qualified charitable distributions (QCDs) from IRAs can satisfy required minimum distributions without increasing your taxable income. This reduces your tax burden and supports causes important to you. Consulting a tax professional can help tailor these strategies to your specific financial situation.

Tax deductions and credits specific to California residents

Understanding California’s renter’s credit

California offers a renter’s credit to residents who pay rent for their primary residence and meet certain income limits. This credit directly reduces the amount of state income tax you owe, making it a valuable benefit for many freelancers and small business owners who rent rather than own their homes.

For the 2024 tax year, single filers with an adjusted gross income (AGI) up to $43,533 and joint filers up to $87,066 may qualify. The credit amount ranges from $60 to $120 depending on your filing status. To claim it, you must file Form 540 or 540 2EZ and include Schedule CA if applicable. Keep your rental agreements and payment records as proof in case of an audit.

To maximize this credit, verify your income eligibility early and ensure you report rent payments accurately on your tax return. Using tax software like TurboTax or TaxAct can help identify if you qualify. Claiming the renter’s credit can reduce your tax bill by up to $120, which is a straightforward way to pay less taxes in California.

Leveraging the California Earned Income Tax Credit (CalEITC)

The California Earned Income Tax Credit (CalEITC) is designed to support low- to moderate-income workers by reducing their state tax liability and potentially providing a refund. Freelancers and small business owners with earned income under $30,000 in 2024 are often eligible.

CalEITC can provide a credit up to $3,027 depending on your income and family size. To qualify, you must file a California tax return and claim the credit using Schedule EIC. Unlike the federal EITC, CalEITC does not require children to qualify, making it accessible to a broader range of taxpayers.

To take advantage of CalEITC, keep detailed records of your income and file your taxes on time. Tools like CalFile, California’s free online tax filing system, can help you claim this credit easily. This credit is a powerful way to lower your tax burden and increase your refund if you meet the income criteria.

Claiming deductions for business expenses unique to California

California allows freelancers and small business owners to deduct ordinary and necessary business expenses on their state tax returns, similar to federal rules. However, some expenses have specific state nuances that can help reduce your taxable income further.

For example, California permits deductions for state-specific licenses and permits required for your business operations. Additionally, if you work from home, you can claim a home office deduction based on the square footage used exclusively for business, following California’s conformity with federal guidelines but with attention to state-specific limits.

To maximize these deductions, maintain thorough records of all business-related expenses, including receipts and invoices. Using accounting software like QuickBooks or FreshBooks can simplify tracking. When preparing your return, complete California Schedule C or Schedule CA to ensure these deductions are applied properly, helping you pay less taxes in California.

How to pay less taxes in California by reducing taxable income

Taxes in California are high, including sales tax and property tax. You might end up paying more than you can handle. There are several ways to lower your taxes, as outlined below.

Claim a home office deduction

Many people have been sent into "working from home" mode starting from 2020. Some of these individuals started their own side businesses, working for themselves. These people also qualify for a home office deduction - so, if you are part of this category and work from home, you may claim a tax return.

The first condition is that you do not need to be under someone else's employment. Therefore, if you have a boss handling that tax return for you, then it is not your concern.

If you have your own business, you must use the space regularly or exclusively for business. For example, you may have an extra bedroom turned into an office. If that office takes one-fifth of your home space, you may claim one-fifth of your utility fees and rent or mortgage as tax deductions.

Start a health savings account

People with a high-deductible medical plan may contribute to a health savings account (HSA) to reduce their taxes. These accounts provide an immediate tax deduction and tax-deferred growth.

These savings may be withdrawn tax-free for qualified medical expenses. Any balance left at the end of the year can roll over like a retirement account.

Write off business trips

When filing your California self-employed taxes, business trips are tax-deductible. You may deduct expenses such as transportation, lodging, or meals consumed with a potential client at a restaurant.

You can combine a vacation with a business trip to reduce costs. Deduct the travel expenses related to the business part, such as plane tickets or hotel bills. Deduct only the percentage spent doing business.

Itemize deductions

If you itemize your deductions in California, you can save money on taxes. For example, include your sales tax or state income tax on Schedule A. This tax break benefits residents, especially those living in states with no income taxes.

Note: if you need help tracking your business expenses, try Bonsai Tax. Our app would automatically discover and record all your tax deductions for you at the push of a button. The majority of users save on average $5,600 from their tax bill. Claim your 7-day free trial today.

Claim military member deductions

Perhaps you are working in the military reserve - for instance, the National Guard. In this situation, you may frequently have to go more than 100 miles away from your home, staying overnight in most circumstances.

When this happens, you can easily deduct those taxes. If there were any other unreimbursed travel expenses, consider claiming those costs at the end of the tax year, including:

• Meals
• Transportation
• Lodging

Likewise, if you are an active member of the service, you may have to deal with tax liability. In that regard, you may deduct tax costs related to your movement from one station to another.

Donate stock to avoid capital gains tax

Avoid capital gains tax by using stocks strategically. This can improve your tax bill by the time you file your 2024 taxes.

Move stocks with large capital gains into a donor fund. These funds are exempt from tax and deductible if you itemize. This strategy can help reduce your tax burden.

Defer taxes

You will eventually have to pay your federal taxes. However, in certain circumstances, it might be better to delay that payment.

Deferring tax payment into the following year is like getting an interest-free loan from the government. You can do this by postponing a bonus from your employer or investing in a retirement account.

Shift income in other directions

If you are in a high tax bracket and pay a lot of taxes, reduce your tax by shifting income to someone in a lower tax bracket, such as your children.

This process is called income splitting or income shifting and is completely legal. It is part of the Tax Cuts and Jobs Act, which made changes to the Kiddie Tax, making it easier to shift income to your children.

Tweak the W-4 accordingly

W-4s are forms that you give to your employer, informing them exactly of how much tax owed you have. This way, they will know how much to withhold from your paycheck.

To save on taxes when facing a big tax bill, increase your withholdings. This will reduce the amount you owe when filing your adjusted gross income tax.

If you expect a large tax refund, reduce your withholdings. This prevents overpaying taxes throughout the year.

Time expenses

There is a significant difference between paying a tax-deductible expense on December 31 versus January 1.

If you have a tax-deductible expense coming up, decide whether to pay it this year or defer it to next year.

For example, making your January mortgage payment in December helps you pay off your obligation earlier and increases your deductible amount this tax year.

Save for college

If you add money to a college savings plan, you should be able to reduce taxable income. Let's say that your college days are gone - but you still have junior to think about.

A popular route is to go for the 529 savings plan, with contributions operated by educational or state institutions. You may not be able to deduct your contributions where federal income tax is involved, but you will be able to get your earned income tax credit for state tax.

Bear in mind that despite the returns on your tax credits, there may also be gift tax liability that you will have to deal with. If your contributions or gifts toward a beneficiary go past $15,000, then you will have an extra fee to pay.

Put money in a 401(k)

At some point, you will have to think about retirement - and the best way to save on your California source income tax is to stash the cash into a 40(k) plan. The IRS will not be taxing the money you direct there from your paycheck.

You may contribute as much as $23,000 every year into a 401(k) account if you are under the age of 50. If you are 50 or older, you can add an extra $7,500 to that sum in 2024.

Add to an IRA

Aside from the 401(k), you may decide to stash the money into individual retirement accounts (IRA) as well. You have two types of IRAs to go for: the traditional IRA and the Roth IRA.

It may be possible for you to deduct the contributions made to a traditional IRA. That being said, the amount that you may deduct from your adjusted gross income will often depend on a variety of factors. These can include how much you make or whether your spouse is also covered by a retirement plan or not.

Check earned income tax credit (EITC)

Things may get slightly complex here, but if you have a knack for tax calculations and you know for a fact you earned less than $57,000 that year, then you might want to look into earned income tax credits.

Depending on how many children you have, your marital status, and your income, you may qualify for earned income tax credits up to $7,430 in 2024.

Tax credits are a type of dollar-for-dollar deduction that you may get on your tax bill. It's different from the standard deduction, which simply reduces the tax implications for your income. If the tax credit takes your tax bill beneath zero, then you might have a good chunk of the money refunded to you by the IRS.

Claim disaster loss deductions

As a taxpayer, you may be able to deduct casualty losses, as long as they have been declared so by the governor or the president. In California, tax cuts for disaster loss are allowed alongside the standard deduction.

For this deduction to apply, the damage needs to be from an event that was unexpected, sudden, or unusual. Some examples may be a fire, an earthquake, a flood, or an event of similar nature. Bear in mind that this deduction may only be claimed if you did not receive reimbursement (i.e., insurance) for the damaged property.

Deduct self-employment taxes

If you get your business income from self-employment, you may be able to deduct your self-employment taxes - or at least, half of them.

According to the Federal Insurance Contributions Act, the government directs 15.3% of your income tax to Social Security and Medicare. In most cases, this is split between the employee and the worker, so you'd only have to pay for half of it yourself.

With that in mind, as a self-employed individual, you'll no longer have a boss to cover half your taxes. You will have to pay the full 15.3% yourself.

The IRS also allows you to deduct 50% of your self-employment taxes to compensate for the extra costs. No itemization is needed either when dealing with this sort of tax deduction.

Why do I owe so much California state tax?

There are various reasons why you may be paying more tax in California. The first reason is that you didn't get enough deductions or withholding. This means that you will be taxed more on income and get less in tax returns. If you went through a period of unemployment, you would also have more California taxes.

Owing a large tax bill may be because you did not claim all eligible tax deductions. As a business owner, you need to file for these deductions. Take advantage of available tax benefits; there are many ways to maximize tax savings.

How to avoid paying California state income tax

Determine your residency status carefully

Your California state income tax obligation depends primarily on your residency status. California taxes full residents on all income, while nonresidents are taxed only on California-sourced income. Freelancers and small business owners should evaluate the "Corbett Factors," a set of criteria used by California courts to determine residency, including where you spend most of your time, location of your family, and where your primary business activities occur.

For example, if you spend fewer than six months in California and maintain a permanent home elsewhere, you might qualify as a nonresident or part-year resident, reducing your California tax liability. Keep detailed records of your travel, work locations, and living arrangements to support your residency claims if audited.

Track your days in California using apps like DaysCount or TaxDayTracker in 2024. Consult a tax professional to apply the Corbett Factors to your situation and formally establish your residency status before filing your state tax return.

Leverage part-year residency and income sourcing rules

California allows part-year residents to pay state income tax only on income earned while they were residents. If you move into or out of California during 2024, you can allocate income accordingly to reduce your tax bill. This strategy is especially useful for freelancers who can time contracts or business activities around residency changes.

For instance, if you relocate to Nevada in July 2024, you only owe California tax on income earned from January to June. However, income sourced from California businesses may still be taxable even after moving out, so it's important to distinguish between earned income and passive income.

To apply this, keep clear contracts and payment records showing when and where income was earned. Use accounting software like QuickBooks or FreshBooks to tag income by location. Filing as a part-year resident requires Form 540NR, so familiarize yourself with its requirements or seek professional help to maximize this benefit.

Consider relocating your business outside California

Moving your business operations to a state with no income tax, such as Nevada or Texas, can significantly reduce your California tax liability. California taxes income generated from business activities within the state. Shifting your business address and primary operations can help avoid state income tax on business profits.

For example, freelancers who register an LLC or S-Corp in Nevada and perform most work there may avoid California income tax, provided they do not maintain a physical office or significant business presence in California. Keep in mind, California has strict rules about "doing business" in the state, so simply having clients in California may still trigger tax obligations.

Consult a tax advisor to properly register your business in the new state and close or scale down California operations. Use virtual office services and cloud-based tools like HelloBonsai or Gusto to manage remote business activities efficiently while minimizing California tax exposure.

Evaluate the impact of retaining a California home

Owning or retaining a home in California can affect your residency status and tax liability. California may consider you a resident if you maintain a permanent place to live in the state, even if you spend significant time elsewhere. This can lead to being taxed on worldwide income.

For example, if you keep a home in San Francisco but live and work primarily in Oregon, California might still classify you as a resident. Selling or renting out your California property and limiting your visits can strengthen your nonresident claim.

To reduce taxes, consider selling your California home or establishing a clear primary residence in another state. Document your living arrangements, and if renting, keep lease agreements and utility bills to prove residency outside California. This approach requires careful planning and professional advice to avoid unintended tax consequences.

What is the deadline for California state tax?

Pay fewer taxes by respecting the deadlines set by the California Franchise Tax Board for your state income taxes. Missing deadlines leads to penalties, which increase your tax bill.

The tax bill usually needs to be filed by October 15. You need to determine whether you will have to pay your California tax on a quarterly basis or a yearly basis. Paying quarterly means you will submit your local taxes four times throughout the year.

The bottom line on how to pay less taxes in California

California's standard deduction in 2024 is $5,540 for single filers and $11,080 for married filing jointly. The standard deduction can be complicated, so learn your way around the tax system. A tax professional may help, but following the tips above should also be useful.