Itemized Deductions for California Taxes: Everything You Need to Know

7

Min Read

David Maina

With tax season fast approaching, now is the right time to look into the deductions you can take advantage of when you file your Federal tax returns. Maximizing your tax deductions allows you to reduce your tax bill and increase tax savings.

In this guide, you’ll learn about the itemized deductions available in California. Let’s get started.

Note: If you are a business owner who needs help organizing and itemizing their business write-offs, try Bonsai Tax. With our services, you can maximize your tax savings and money during tax time. In fact, users generally save $5,600 from their self-employed income tax. Claim your 14-day free trial here.

California State Taxes Explained

If you're a resident, part-year resident, or nonresident and have income from a source in California that exceeds the filing threshold, you must file an income tax return in the state.

California tax is a separate, state-imposed tax on income you earned while working in a specific state. It's different from the federal income tax where taxpayers have to pay the federal government a percentage of their income.

State taxes are due in part throughout the year and in one lump sum by April 15 each year, just like your federal tax bill.

If you work for an employer or other company, your employer withholds California taxes from your paycheck based on the withholding information you provide them. If you are an independent contractor or self-employed, your California estimated tax payments are based on net earnings.

You can calculate your California self-employment taxes, here. Our calculator would give you a better understanding of how much tax liability you will owe to the government at the end of the year.

Your net earnings include all the income you get while working in California, less statutory adjustments. Your employer will give you a W-2 form at the end of each year that shows your total gross and your adjusted state's taxable wages (your gross wages minus statutory write-offs). You must use these figures when preparing your state tax return.

What is The Standard Tax Deduction Rate In California?

Basically, a standard deduction is a flat-dollar amount you get to write-off from your taxable income. The IRS defines a standard deduction as the amount of money that is not taxed and can be subtracted from taxable income to lower your tax burden. You may take the Standard Deduction if you do not itemize your deductions on Form 1040, section A (Schedule A), to calculate taxable income.

The Impact of Filing Status On the Standard Deduction Amount

The amount of your standard deduction depends on your filing status.

For example, if you're married and filing a joint federal tax return for 2021, your standard deduction will be $25,100. For single filers and taxpayers who are married but filing separately, there's a $12,550 standard deduction and for heads of households, the number is $18,800.  

For California residents, the standard tax deduction is $4,601 for single filers, married couples or  married couples filing separately and qualifying widow. And for head of household and married couples filing jointly the standard deduction is $9,202.

California Tax: Itemized Deductions Explained

An itemized deduction is basically a line-item receipt for expenses you paid during the tax year that qualify as legitimate deductions.

The amount you can deduct for itemized deductions differs from person to person. California standard deduction rates are, as the name implies, a fixed sum, however, itemized deductions are calculated by adding up all eligible deductions and subtracting them from your taxable income after being adjusted for any tax benefits.

You can choose to use either an itemized or standard deduction on your income taxes. If your itemized deductions add up to less than the standard deduction, it's probably not worth taking them because you won't get a bigger tax refund.

Common California Itemized Deductions

If you have any questions about if you meet eligibility criteria to claim certain tax deductions, we always recommend you talk with a tax accountant. A tax accountant will help you follow the laws, and pay less taxes in California. Here's an overview of the itemized deductions available for California residents:

Medical expenses

You can include medical and dental expenses that you paid for yourself, your spouse, and your dependents. Eligible costs include doctor and dentist visits, hospital care, prescription drugs, and long-term care insurance coverage. You can also deduct the cost of eyeglasses, contact lenses, and hearing aids. Transportation costs associated with medical care — such as driving to a clinic or pharmacy — can be deducted.

For both federal tax as well as California state and local taxes, you can only deduct expenses that exceed 7.5 percent of your Adjusted Gross Income (AGI). For example, if you earned $50,000 in 2021, you could only deduct expenses above $3,750 (7.5 percent of $50,000).

Home mortgage interest

The Internal Revenue Code allows homeowners to claim an interest deduction from their home purchases. California allows folks to write-off all of their mortgage interest payments from their taxable income. The amount of mortgage interest that can be deducted is capped, and the tax savings of this deduction varies depending on a taxpayer's marginal tax rate.

For federal taxes, mortgage interest is deductible to a maximum of $750,000 for individuals who file as single, married filing jointly, or head of household. For individuals who are married but file separately, the amount is $375,000 each.

In California, the limit is higher – a home mortgage is deductible to a maximum of $1 million.

If you bought and installed energy efficient equipment into your home from a public utility companies, you can claim a tax deduction on thee amount from your Federal tax return.

Job-Related Deductions

If you're an employee in California, you may be able to deduct work-related expenses that aren't reimbursed by your employer. Eligible write-offs include the costs of traveling for business purposes, as well as union dues and work clothes.

To qualify for this deduction, you need to meet the following requirements:

  • You incurred the costs during the current tax year
  • Your expenses must be trade or business-related
  • Your expenses need to be "ordinary and necessary" to your line of work

Unreimbursed job costs can include:

  • The cost of tools and supplies
  • Business use of your auto if your employer requires that you drive a car for work purposes
  • Dues to professional associations and chambers of commerce, and subscriptions to professional journals and publications
  • Travel costs (including meals and lodging) while traveling away from home on business The deduction for travel expenses is limited to the costs of getting to and from your job, including gas and oil. You can't deduct any costs for personal reasons, commuting costs home at the end of the day, or most overnight travel expenses.

Prior to 2018, employees could deduct unreimbursed work-related expenses that exceeded 2% of their federal adjusted gross income. Unfortunately, the Tax Cuts and Jobs Act of 2017 suspended the deduction for unreimbursed employee costs.

But the state of California doesn't conform to most of the act's guidelines. So if you're a California resident, you can claim this deduction on your state tax return.

Gambling losses

California taxpayers are allowed to deduct gambling losses, but only up to the amount of their winnings. So if you lost $500 at blackjack and won $300 on a slot machine, you could only report losses up to $300.

But for federal taxes, deducting gambling losses is slightly different. The expenses you incur when you carry out wagering transactions are also included. Deductions for carrying out a wagering activity -- plus gambling losses -- are limited to the extent of your winnings.

To take full advantage of this deduction, you'll need proper documentation to prove your losses. For example, keep your losing tickets or receipts from each wager, along with a record of any winnings that you expect to report on your return.

The documents you keep need to include:

  • the dates you gambled
  • the types of gambling you participated in
  • name and address of the gambling locations where you play
  • how much money you win or lose
  • people you gamble with

Personal casualty or theft losses

If you experienced a casualty loss in 2021, you'll need to report it on your 2022 California return. This includes losses from fires, accidents, or thefts that occurred in the year.

To be eligible for this deduction, your property must have been damaged or destroyed by either:

  • fire
  • lightning
  • windstorm
  • explosion
  • shipwreck
  • tidal wave
  • smog (airborne chemical reactions that cause damage and destruction)

You can deduct only the portion of a deductible loss that isn't reimbursed by insurance. As a result, if the damage is entirely covered, you will receive no deduction. Furthermore, the personal exemption for casualty losses to personal property is strictly limited: you can deduct only the amount of all your catastrophe losses that exceed 10% of your AGI.

David Maina
David is an experienced B2B financial copywriter, specializing in content related to accounting, financial planning, and small businesses. Over the years, he has helped fintech brands win more traffic and skyrocket conversions with engaging, long-form content. A nerdy interest in numbers, and passion for creative writing drives him to create financial content that's truly unique. You can reach him at financeandinsurancewriter.com

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