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.
Things such as your filing status and your adjusted gross income can determine just how much you'll have to pay. That being said, when the income tax seems too high, there are still several things that you may do.
Mainly, you need to learn how to work around tax bill deductions. This way, you should be able to receive your refundable tax credit. Read on and find out some good tips to do that.
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 goes between 1% and up to 13.30% (as of 2020). It all depends on the taxable income, along with the filing status. Your residency status will also determine whether you are taxable or not.
Moreover, the marital status will influence just how much someone can pay or deduct from their taxes. Things such as property taxes may add to that payment, so you may want to thoroughly calculate your taxes. Based on your income and assets, you will be placed in a tax bracket.
How Can I Reduce My California Taxable Income?
Taxes in California are high, from the sales tax to the property tax. As a result, you might end up paying more than you can handle. If you have high taxes, there are several ways in which you can lower them as you can see below.
Claim Your 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 do have your own business, then you must use that space regularly or exclusively for the business. For example, you may have an extra bedroom that you turned into an office. If that office takes one-fifth of your home space, then you may claim one-fifth in tax deductions for utility fees and rent or mortgage.
Start a Health Savings Account
People with a high-deductible medical plan may contribute to a health savings account in order to reduce their taxes. These accounts provide an immediate tax deduction and are deferred from tax.
These savings may be withdrawn tax-free, as long as they are for qualified medical expenses. If there is any balance left at the end of the year, then it can roll over in the same way as a retirement account.
Write Off Business Trips
When filing your California self-employed taxes, business trips are tax-deductible. So if you go somewhere on business, then you may deduct the expenses that served that purpose. This includes transportation, lodging, or food that was consumed with a potential client at a restaurant.
You may also combine a vacation with a business trip in order to reduce the costs. Simply deduct the travel expenses associated with the business part, such as a plane ticket or hotel bill. You'll only be able to deduct the percentage that you spent doing business.
Itemize Your Deductions
If you itemize your deductions in California, you will once more be able to save money on taxes. For instance, you may include your sales tax or state income tax on a Schedule A form. The tax break will benefit you here, especially if you reside in a state 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 Members 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 should know that you can easily deduct those taxes. If there were any other unreimbursed travel expenses (i.e., meals, transportation, and lodging), then you may claim those costs at the end of the tax year.
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
If you want to avoid capital gains tax, then you may want to use stocks. This should help your tax bill look much better by the time you file for your taxes.
Move the sticks that have big capital gains tax into a donor fund. These funds are exempt from tax and are deductible by those who attempt to itemize them. If you want to reduce your tax burden, then this is bound to help you out.
Defer Your Taxes
Eventually, you will have to deal with your taxes. Everything that is owed to the federal government will have to be paid for sooner or later. That being said, in certain circumstances, it might be better to make that payment later.
When you defer the payment into the following year, it's like getting a loan from the government - one that you will not have to pay any interest for. There are multiple ways to do so, such as postponing a bonus from your employer or investing in a retirement account.
Shift Your Income In Other Directions
Let's say that you are part of a high tax bracket and you pay a lot of taxes every year as a result. Very often, a good way to reduce your tax is to shift your income to someone who is in a lower tax bracket than you are - for instance, your children.
This process is referred to as income splitting or income shifting - and don't worry, it's completely legal. It's part of the Tax Cuts and Job Acts, which made a couple of changes to the "Kiddie Tax." This makes it much easier for you to shift your 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 help your tax savings when you have a big tax bill coming around, you may want to tweak your withholdings a bit and raise them. This way, when you'll be filing for your adjusted gross income tax, you will have significantly less to pay.
With that in mind, if you have some big tax refunds coming your way, you might want to do the opposite thing. Rather than raising your withholdings, try reducing them. This way, you won't end up paying more in taxes than you are actually supposed to.
Time the Expenses
It might not seem that important to you, but there's a huge difference between doing something on the 31st of December and doing it the next day, on the 1st of January.
If you have a tax-deductible expense coming around, think about whether you can pay it this year or if you can defer it to next year.
For instance, by making your January payment for your mortgage in December, you'll get your payment off your back earlier and you'll also have more tax to deduct this 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 the 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 funnel as much as $19,500 every year into that account, as someone under the age of 50. If you are older than 50, then you may add an extra $6,500 to that sum.
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 Into 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 kids you have, your marital status, and your income, you may be able to get tax credits up to $7,000.
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 Taxes?
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.
Bear in mind that the fact that you owe so much tax may also be because you did not get your due tax deduction. As a business owner, you need to file for them. You also need to take advantage of the tax benefits provided to you, as there are many things that you may do in order to get the most out of your taxes.
What Is the Deadline for California State Tax?
For you to pay fewer taxes, you will have to respect the deadlines that the California Franchise Tax Board set up for your federal income taxes. Missing a deadline might lead to penalties - which means that you will have to pay more.
The tax bill usually needs to be filed by October 15. That being said, you need to determine whether you will have to pay your California tax on a quarterly basis or a yearly basis. The latter will have you paying your local taxes four times throughout the year.
The Bottom Line
The standard deduction in California may be occasionally complicated and sometimes expensive. This is why you need to learn your way around the tax system. A tax professional may be able to help but following the above tips should also be useful.