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California Retirement Tax Friendliness

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Overview of California Retirement Tax Friendliness

Income from retirement accounts and pensions are fully taxed by California, at some of the highest state income tax rates in the country. Social Security retirement benefits are exempt but California has some of the highest sales taxes in the U.S.

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  • Retirement Tax Friendliness Overview
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California Retirement Taxes

Photo credit: ©iStock.com/omersukrugoksu

In some ways, the Golden State is a perfect place for a happy retirement. It has miles of beautiful coastline and sandy beaches. The weather is sunny and mild. Northern California has the country’s best wine region and mountain ranges such as the Sierra Nevada provide great opportunities for recreation.

As many reasons as there are in favor of a California retirement however, there may be just as many against it. For starters, it has a cost of living that is 38% higher than the national average. This is the third highest in the country.

And then there are the taxes. While California exempts Social Security retirement benefits from taxation, all other forms of retirement income are subject to the state’s income tax rates. Those range from 1% to 12.3%. Additionally, California has some of the highest sales taxes in the U.S. Below, we answer key questions regarding retirement taxes in California.

Is California tax-friendly for retirees?

No. Income from retirement accounts and pensions are fully taxed, at some of the highest state income tax rates in the country. Social Security retirement benefits are exempt, although given the state’s high cost of living it will be difficult for most seniors to afford to live in California on only Social Security income.

California also has high sales taxes, with an average state and local rate of nearly 8.5%. That’s eighth highest in the U.S.

Is Social Security taxable in California?

No! Social Security retirement benefits are not taxed at the state level in California. Keep in mind, however, that if you have income from sources besides Social Security, you may need to pay federal taxes on your Social Security income.

Are other forms of retirement income taxable in California?

Yes. Retirement account income, including withdrawals from a 401(k) or IRA, is considered taxable income in California. So is all pension income, whether from a government pension or a private employer pension. All of it is combined with any other income (such as work income) and taxed according to the income tax brackets shown in the table below.

Income Tax Brackets

Single Filers
California Taxable IncomeRate
$0 - $7,8501.00%
$7,850 - $18,6102.00%
$18,610 - $29,3724.00%
$29,372 - $40,7736.00%
$40,773 - $51,5308.00%
$51,530 - $263,2229.30%
$263,222 - $315,86610.30%
$315,866 - $526,44311.30%
$526,443+12.30%
Married, Filing Jointly
California Taxable IncomeRate
$0 - $15,7001.00%
$15,700 - $37,2202.00%
$37,220 - $58,7444.00%
$58,744 - $81,5466.00%
$81,546 - $103,0608.00%
$103,060 - $526,4449.30%
$526,444 - $631,73210.30%
$631,732 - $1,052,88611.30%
$1,052,886+12.30%
Married, Filing Separately
California Taxable IncomeRate
$0 - $7,8501.00%
$7,850 - $18,6102.00%
$18,610 - $29,3724.00%
$29,372 - $40,7736.00%
$40,773 - $51,5308.00%
$51,530 - $263,2229.30%
$263,222 - $315,86610.30%
$315,866 - $526,44311.30%
$526,443+12.30%
Head of Household
California Taxable IncomeRate
$0 - $15,7101.00%
$15,710 - $37,2212.00%
$37,221 - $47,9824.00%
$47,982 - $59,3836.00%
$59,383 - $70,1428.00%
$70,142 - $357,9819.30%
$357,981 - $429,57810.30%
$429,578 - $715,96211.30%
$715,962 - $1,000,00012.30%
$1,000,001+13.30% (1% Mental Health Services Tax Rate + 12.3%)

How high are property taxes in California?

Property tax rates in California are relatively low, although high home values mean the cost of property taxes is still higher than in most other states. The average effective rate across the state is 0.81%, which ranks as the 17th lowest in the U.S.

However, property taxes cost most homeowners in California at least $3,000. That contributes to overall housing costs in the Golden State that are over twice the national average.

What is the California homeowners’ exemption?

Owner-occupied homes in California are eligible to receive the homeowners’ exemption. It reduces taxable value by $7,000. That saves homeowners at least $70 per year, although for many homeowners the savings will be even greater.

Beginning on September 1, 2016 seniors in California may also be able to defer payment of their property taxes if they meet income requirements. While the exact details of this deferral program are still being released, applicants with household income of less than $35,500 will be considered.

Photo credit: ©iStock.com/Ron Thomas

How high are sales taxes in California?

Very high. California has the highest state sales tax in the country at 7.5%. That is the minimum you will pay anywhere in the state, but local taxes as high as 2.5% mean you will likely pay an even higher rate. Overall, the average rate you can expect to pay in California is 8.5%. For a retiree who spends $10,000 per year on taxable goods, that means total sales taxes of about $850.

The good news is that not all goods are taxable. In fact, a number of exemptions are designed specifically to benefit seniors and retirees. That includes an exemption for prescription drugs and an exemption for most types of groceries.

What other California taxes should I be concerned about?

If you have investments that you are planning to sell during retirement, it’s important to be aware of the California capital gains tax. Any capital gains in California, including long-term capital gains, are taxed as regular income at the tax rates shown in the bracket table above.

For example, if one year you have $30,000 in retirement income (not including Social Security) and $5,000 in capital gains, you will pay a 6% state tax on those capital gains, in addition to the 15% federal capital gains rate. That would be about $300 in state capital gains taxes.

Most Tax Friendly Places for Retirees

SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.

Highest
Lowest
Rank City Income Tax Paid Property Tax Rate Sales Tax Paid Fuel Tax Paid Social Security Taxed?

Methodology Our study aims to find the areas with the most tax-friendly policies for retirees. To do that we looked at how the tax policies of each city would impact a retiree with a $50,000 income. Our hypothetical retiree is getting $15,000 from Social Security benefits, $10,000 from a private pension, $15,000 from retirement savings like a 401(k) or IRA and $10,000 in wages.

To calculate the expected income tax this person would pay in each location we applied deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at the federal, state, county and local levels.

We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.

In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income less income tax. This product is then multiplied by 35% to estimate the sales tax paid.

For fuel taxes, we first distributed statewide vehicle miles traveled down to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.

For each city we determined whether or not Social Security income was taxable.

Finally, we created an overall index weighted to best capture the taxes that most affect retirees. We gave a 4x weighting to income tax, 3x weighting to property tax rate, a 2x weighting to sales tax and 1x weighting to fuel tax.

Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2015 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration

More from SmartAsset
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