does california tax social security benefits

does california tax social security benefits

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California Retirement Taxes

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 far higher than the national average.

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

which range from 1% to 13.3%. Additionally, California has some of the highest sales taxes in the U.S.

A financial advisor in California can help you plan for retirement and other financial goals. Financial advisors can also help with investing and financial plans, including taxes, homeownership, insurance and estate planning, to make sure you are preparing for the future.

Is California tax-friendly for retirees?

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 combined rate of 8.68%. That’s one of the highest in the U.S.

Is Social Security taxable in California?

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?

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.

California offers a senior income tax exemption in addition to its personal exemption

More specifically, seniors receive an extra benefit that allows them to double the standard exemption.

For the 2020 tax year, California increased the personal exemptions for all filing statuses. For singles and married people filing separately, the exemption jumped from $122 to $124, whereas married people filing jointly and surviving spouses saw their exemption increase to $248 from $244. So if you’re over 65 years of age, you can double your exemption to either $248 or $496, depending on your filing status.

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 0.73%.

However, property taxes cost the average homeowner in California more than $4,100. That contributes to overall housing costs in the Golden State that are well over 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.

In 2016, the state controller reinstated the Property Tax Postponement Program. This allows homeowners who are seniors, are blind or have a disability to defer their property taxes. This is only available for taxes on a primary residence. You also need to have at least 40% equity in the home and an annual household income of $35,500 or less.

How high are sales taxes in California?

California has the highest state sales tax rate in the country at 7.25%. That is the minimum you will pay anywhere in the state, but local taxes as high as 3.25% mean you will likely pay an even higher rate. Overall, the average rate you can expect to pay in California is 8.68%.

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 ordinary income at the tax rates shown in the bracket table above.

does california tax social security benefits

How to Avoid Paying Taxes on Social Security Income

Is Social Security taxable? For most Americans, it is. That is, a majority of those who receive Social Security benefits pay income tax on up to half or even 85% of that money because their combined income from Social Security and other sources pushes them above the very low thresholds for taxes to kick in.

You can, however, use some strategies, before and after you retire, to limit the amount of tax you pay on Social Security benefits. Keep reading to find out what you can do starting today to minimize the amount of income taxes you pay after retiring.

How Much of Your Social Security Income Is Taxable?

Social Security payments have been subject to taxation above certain income limits since 1983.1 No inflation adjustments have been made to those limits since then, so most people who receive Social Security benefits and have other sources of income pay some taxes on the benefits.

No taxpayer, regardless of income, has all of their Social Security benefits taxed. The top-level is 85% of the total benefit.2

Here’s how the Internal Revenue Service (IRS) calculates how much is taxable:

Individual Tax Rates

Benefits will be subject to tax if you file a federal tax return as an individual and your combined gross income from all sources is as follows:

Between $25,000 and $34,000: You may have to pay income tax on up to 50% of your benefits.

More than $34,000: Up to 85% of your benefits may be taxable.2

Married Tax Rates

For couples who file a joint return, your benefits will be taxable if you and your spouse have a combined income as follows:

Between $32,000 and $44,000: You may have to pay income tax on up to 50% of your benefits.

More than $44,000: Up to 85% of your benefits may be taxable.2

For example, say you are a semi-retired couple filing jointly and have a combined Social Security benefit of $26,000, in 2020. You had $30,000 in “other” income.

Add the two together and you have a gross income of $56,000, or a $43,000 in combined income (gross income plus half your Social Security benefits).

This combined income falls in the $32,000 to $44,000 range, meaning half of your benefits, or $13,000, will be taxable.