California is known the world over for its picture-perfect beaches and sunny weather. However, the Golden State also has one of the highest costs of living in the U.S., and Californians pay some of the highest capital gains taxes in the entire world. California taxes all capital gains as income, unlike the federal government, which differentiates between long-term and short-term capital gains for tax purposes. Understanding California capital gains tax rate obligations can help you make smart decisions for your financial future.
California taxes all capital gains as regular income. This means you will pay a California income tax rate anywhere from 1 to 13.3 percent depending on your tax bracket.
Finding 2018 California Income Tax Rates
California has nine marginal tax rate brackets ranging from 1 to 12.3 percent, and income over $1 million is subject to an additional 1 percent Mental Health Services surtax that isn’t included in the marginal tax rate schedule. Your filing status and the amount of income you earned for the year determine at which rate you will be taxed. Because California does not give any tax breaks for capital gains, you could find yourself taxed at the highest marginal rate of 12.3 percent, plus the 1 percent Mental Health Services tax. This is maximum total of 13.3 percent in California state tax on your capital gains. When you take into consideration that the IRS can also levy a maximum of 37 percent in federal taxes on your capital gains, it becomes crystal clear how and why capital gains in California are among the highest taxed in the world.
The following figures are the 2018 California marginal tax rates and thresholds for single filers or those who are married filing separately, published by the California State Franchise Tax Board:
Single or Married Filing Separately
1.00 percent: $0 –
$8,544 2.00 percent: $8,545 – $20,255
4.00 percent: $20,256 –
6.00 percent: $31,970 –
8.00 percent: $44,378 –
9.30 percent: $56,086 –
10.3 percent: $286,493 – $343,788
11.3 percent: $343,789 –
12.3 percent: $572,981 –
$999,999 * 12.3 percent +1 percent Mental Health Services surtax: $1,000,000+
Looking at Capital Gains and California Residency
Even if you move out of the state of California, depending when you leave and when the capital asset was sold, you may still have capital gains tax California obligations. California has strict rules for determining residency. For instance, if you live in the state of California for more than nine months, you are presumed to be a resident. If you were to sell any capital asset at any point after living in California for this length of time, then you will be required to pay California for the gains you realized while in the state.
In the case of real estate capital gains, California taxes everyone, not just residents. You can also be considered a resident of California for up to 18 months after you’ve moved away. Stop by the State of California Franchise Tax Board for more information on determining residency. FTB Publication 1031, "Guidelines for Determining Resident Status" has all the guidelines you’ll need to know regarding residency in the Golden State and capital gains tax rate information.
Reporting Your Income
You can use IRS Form 1040 and Schedule D of IRS Form 1040 to report your personal income as well as capital gains earned throughout the taxable year. It is important to note, that starting in the 2019 tax season, the IRS will unveil a new, more streamlined 1040 that condenses the three current versions of the 1040 into one shorter form.