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.
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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.
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 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.
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.
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:
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).
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.
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:
Unreimbursed job costs can include:
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.
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:
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:
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.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?