State Income Tax Breaks in California

Whether you use tax software to prepare your tax return or you prepare your return on paper, you need to know all the tax breaks you qualify for. If you live in California, you not only have your federal return to prepare, but also your California state tax return. To prepare your California return, you start with your federal adjusted gross income. Then you make certain additions and subtractions to arrive at your California adjusted gross income. From that amount you subtract your California standard deduction or itemized deductions to determine your taxable income.

You generally find your tax in the tax table or use the tax rate schedule. Then you deduct any credits you qualify for, subtract the California tax that was withheld from your pay during the year and any estimated tax payments you made, and add any voluntary contributions you want to make to determine your refund or the balance you owe.

If you are a California resident the entire year, you use either Form 540 2EZ, the short form 540A or the long form 540 to prepare your California return. Nonresidents or part-year residents of California use either the short form 540NR or the long form 540NR. You can use the tool "Which tax form should I use?" on the California Franchise Tax Board website to help you. Or you can see the table in the Personal Income Tax Booklet.

California subtractions

California tax law generally conforms to federal tax law, but there are some differences that you need to take into account in preparing your California return. You use schedule CA(540) - California Adjustments to show the differences between your federal adjusted gross income and your California adjusted gross income. These differences are due to different tax treatments of certain items of income and deductions for federal and California tax purposes. The following are some of the more common types of adjustments. You should review the instructions to ensure that you properly report all your California additions and subtractions.

If you included a California state income tax refund on your federal tax return because you had claimed an itemized deduction for the taxes the prior year, you can subtract this refund on your California state tax return.

Unemployment compensation is not taxable in California. If you reported any unemployment compensation as income on your federal return, you can subtract it on your California return.

Any portion of your social security or railroad retirement benefits that were included on your federal tax return can be subtracted on your California state tax return. These benefits are not taxable in California.

Interest income from U.S. Government obligations, such as savings bonds and treasury bills, that are included in your federal tax return, are subtracted on your California state tax return. But interest from municipal or state bonds from a state other than California is taxable in California.

California lottery winnings are not subject to California income tax. If you included these winnings on your federal income tax return, you can subtract them on your California return. Lottery winnings from other states are taxable in California. California lottery losses are not deductible on your California return.

If you received a distribution from a Health Savings Account that you did not use to pay for qualified medical expenses and you had to include the distribution as income on your federal tax return, you can subtract it on your California return. These distributions are not subject to tax in California. But California does not allow a deduction for contributions to a Health Savings Account, so if you claimed a deduction on your federal return you have to add it back to your income on your California return.

If you are a member of the military service and are stationed in California but are not a resident, your military pay is not subject to California tax. If you have other sources of income in California, you may be subject to tax on that income.

Credits

There are various credits you may qualify for when you file your California income tax return. Some of these credits have separate lines on the tax form and others require you to identify the credit with a code. You can find these codes in the instructions. The following are examples of some of the credits available. You should review the instructions to see if there are any other credits you may be eligible to claim.

If you were a resident of California for the entire year, you paid rent on your principal residence, and your California adjusted gross income is below a certain limit, you could qualify for the renter's credit. The credit is $60 if you are single or married filing separately and $120 if you are filing as head of household or married filing jointly.

If you are single or married filing separately and you have joint custody of a child, step child or grandchild, you could qualify for the Credit for Joint Custody Head of Household. You must have furnished over half the household expenses of a home that was the child's main home for at least 146 days but not more than 219 days of the year. The credit is 30% of your total tax or $393, whichever is less.

If you are married filing separately and you furnished more than half the household expenses of your dependent mother or father's home, whether or not she or he lived with you, you could qualify for the Credit for Dependent Parent. This credit is 30% of your total tax or $393, whichever is less. You cannot claim both the Credit for Joint Custody Head of Household and the Credit for Dependent Parent.

If you are age 65 or older at the end of the tax year, you qualified to file as head of household in either of the two prior years, and your income is below a certain limit, you could qualify for the Credit for Senior Head of Household. You do not have to qualify as head of household in the current tax year in order to qualify for the credit. For example, you could qualify if the person who qualified you as head of household in one of the two previous years has died. The credit is 2% of your taxable income or $1,203, whichever is less.

If you adopt a child who is a citizen or legal resident of the United States and is in the custody of a California public agency or political subdivision, you can claim a credit for 50% of your adoption expenses the year the adoption is final. Adoption expenses include fees, unreimbursed medical expenses and travel expenses. The maximum credit is $2,500 and if that is more than your total tax, you can carry forward the unused balance and apply it against your taxes in future years until the credit is used up.

If you paid someone to care for your child under age 13 or other dependent who cannot care for him or herself, and your federal adjusted gross income is $100,000 or less, you could qualify for the Child and Dependent Care Expenses Credit. To claim this credit you have to file Form 3506. The credit is a percentage of your expenses, up to a certain maximum amount. The percentage to use is indicated in a table in the instructions for Form 3506.

If you paid income tax in another state or U.S. possession on income that is also included on your California income tax return, you can claim a credit for the tax paid in the other state or U.S. possession.

Sources:
Individuals - State of California Franchise Tax Board
California 540 & 540A Personal Income Tax Booklet - State of California Franchise Tax Board