As a long-time Los Angeles Financial advisor, who does a ton of tax planning for my clients, I’d be willing to bet most people in CA have no idea what the California capital gains rates are. Keep reading to find out how much California will be taxing your investment gains.
By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™
With more than 40 million people officially living in California, the great weather and beautiful beaches, mountains, Palm Springs must be doing something right. The hurdles to be financially successful in this state are high. California has one of the highest costs of living in the US and is one of the highest income tax states. Taxation of capital gains in California is no less well taxing on investors’ budgets. The more taxes you pay, the harder it will be for you to build wealth.
California taxes all capital gains as regular income. This means you could get hit with surprisingly large tax bills on your investment accounts if you live in California.
In contrast, the Federal Government will differentiate between long-term capital gains and short-term capital gains for tax purposes. Capital gains tax rates range from zero-percent up to 37%, depending on the type of capital gains being taxed. It has been my experience as a Los Angeles financial planner; many people ignore state capital gains taxes when doing their tax planning (that is, assuming they are doing any tax planning at all). Understanding California capital gains tax rate obligations can help you make proactive money moves to minimize your taxes owed to the Franchise Tax Board.
How Does California Tax Capital Gains?
Simply put, California taxes all capital gains as regular income. It does not recognize the distinction between short-term and long-term capital gains. This means your capital gains taxes will run between 1% up to 13.3%, depending on your overall income and corresponding California tax bracket.
How California taxes capital gains make it imperative that your work with a fabulous financial planner to do proactive tax planning.
Determining Your 2021 California Income Tax Rates
California taxpayers are subject to nice progress marginal tax rate brackets. The tax brackets in California range from a low of just 1% to a high of 12.3%. Being a progressive state with a progressive income tax system, there is an additional 1% tax on incomes above $625,370, if you file as single. This is a Mental Health Services surtax that isn’t included in the marginal tax rate schedule.
Your state tax-filing status and the overall amount of income you earned for the year determine at which rate you will be taxed. With California not giving any tax breaks for capital gains, you could find yourself getting hit with a total state tax rate of 13.3% on your capital gains. This is often a surprise to the tech millionaires working at companies like Tesla TSLA -1% TSLA -1%, Apple AAPL +0.2% AAPL +0.2%, Airbnb, or even SpaceX with substantial stock options.
I am a huge fan of tax planning and tax loss harvesting. Employing tax-saving strategies are imperative for a resident of California with “high” incomes. I am putting quotes around high because you get hit with a 9.3% capital gains tax at just $61,215 of income if you are single. That’s hardly enough income to call yourself “rich.”
Federal Capital Gains Tax Brackets 2021
- 0 percent: $0 to $40,000
- 15 percent: $40,401-$445,850
- 20 percent: $445,850 or more
Married Filing Jointly
- 0 percent: $0 to $80,800
- 15 percent: $80,800-$501,600
- 20 percent: $501,600 or more
California state tax rates and tax brackets
California Tax Brackets for Single Taxpayers
|Tax rate||Taxable income bracket||Tax owed|
|1%||$0 to $9,325.||1% of taxable income.|
|2%||$9,326 to $22,107.||$93.25 plus 2% of the amount over $9,325.|
|4%||$22,108 to $34,892.||$348.89 plus 4% of the amount over $22,107.|
|6%||$34,893 to $48,435.||$860.29 plus 6% of the amount over $34,892.|
|8%||$48,436 to $61,214.||$1,672.87 plus 8% of the amount over $48,435.|
|9.3%||$61,215 to $312,686.||$2,695.19 plus 9.3% of the amount over $61,214.|
|10.3%||$312,687 to $375,221.||$26,082.09 plus 10.3% of the amount over $312,686.|
|11.3%||$375,222 to $625,369.||$32,523.20 plus 11.3% of the amount over $375,221.|
|12.3%||$625,370 or more.||$60,789.92 plus 12.3% of the amount over $625,369.|
California Tax Brackets for Married/Registered Domestic Partner (RDP) Filing Jointly Taxpayers (and Qualifying Widowers)
|Tax rate||Taxable income bracket||Tax owed|
|1%||$0 to $18,650.||1% of taxable income.|
|2%||$18,651 to $44,214.||$186.50 plus 2% of the amount over $18,650.|
|4%||$44,215 to $69,784.||$697.78 plus 4% of the amount over $44,214.|
|6%||$69,785 to $96,870.||$1,720.58 plus 6% of the amount over $69,784.|
|8%||$96,871 to $122,428.||$3,345.74 plus 8% of the amount over $96,870.|
|9.3%||$122,429 to $625,372.||$5,390.38 plus 9.3% of the amount over $122,428.|
|10.3%||$625,373 to $750,442.||$52,164.17 plus 10.3% of the amount over $625,372.|
|11.3%||$750,443 to $1,250,738.||$65,046.38 plus 11.3% of the amount over $750,442.|
|12.3%||$1,250,739 or more.||$121,579.83 plus 12.3% of the amount over $1,250,738.|
For other the California Income Tax Rate for other filing status visit the Franchise Tax Board site.
With the stock market soaring to record highs in 2021 and many Californians earning high incomes- even during the COVID Recession- tax planning is a must. Work with your fee-only financial planner to develop a plan to help minimize your federal and California state taxes.
The bottom line capital gains are subject to Californias regular income tax brackets. Which can add to your overall tax burden each year, if your Los Angeles financial advisor doesn’t offer tax planning guidance. Or worse doesn’t take into account taxes when managing your investments and retirement accounts.
DAVID RAE, CFP®, AIF® is a Los Angeles-based financial planner with DRM Wealth Management, a regular contributor to Advocate Magazine, Huffington Post, Forbes not to mention numerous TV appearances. He helps smart people across the USA get on track for their financial goals. For more information visit his website at www.davidraefp.com