Overview of California Income Tax

Personal Income Tax or PIT in the State of California is paid in addition to the Federal Income tax. Introduced in 1935, it singly generates the highest revenue for the state as compared to other sources. Both residents and non-residents are liable to pay PIT in California. Nonresidents pay California PIT only on income derived from sources in California.

The state rose close to thirty five billion dollars in the year 1999-2000, which accounted for about forty percent of the total revenues generated by the state. California PIT is payable on income from all sources, unless covered by statutory exemption. Therefore salary, wages, dividend, interest, capital gains and income from business all are subject to PIT. Different categories of California personal income taxpayers include individuals and partnerships, sole proprietorships, estate and trusts.

PIT rates in California are based on the status of the taxpayer. The returns can be filed under five different categories or status, depending on where the taxpayer fits in. They can file as single, married filing a joint return, married filing a separate return, and surviving spouse or as head of household.

For the computation of PIT, there are six different tax brackets, with a different rate of taxation for each bracket. As per the year 2000 details, the rates varied from one percent to three decimal points above nine percent of the taxable income. Personal Income Tax in California is a progressive tax, which means that as your income level goes up, the effective rate of taxation rises. To cite an example, a married taxpaying couple with two dependants and having a taxable income of fifty thousand dollars would be taxed at 1.4 percent, whereas if they had a taxable income of one hundred thousand Dollars, with other conditions remaining the same, their effective rate of taxation would be 4.

8 percent instead. The major part of PIT revenue comes from wages and salaries and accounts for nearly sixty percent of the total. Capital gains taxation contributes to a much lesser extent however, in recent years the share of capital gains has been steadily increasing. This has been on account of many factors. Firstly, because the nature of income is generally attributable to high bracket income tax payers and is therefore, subject to be taxed at higher rates. The dollar amount of capital gains has risen rapidly in recent times.

Now as capital gains are highly volatile, being mostly related to the stock market and the housing sector, they make PIT volatile and difficult to forecast and this poses many revenue-related challenges. In the US, forty-three states and the District of Columbia impose personal income tax. By making an interstate comparison, it is found that the California PIT is above average than all other states. In marginal tax rates, the upper most level of marginal tax rate in California is quite high, as compared to most other states and it is next only to Oregon, although the lowest marginal tax rate covers a rather wide band of income range. The PIT burden in California is certainly higher. It is another matter that the cumulative burden of all other taxes in the state of California is near average, which helps to mitigate the effects of a higher PIT to some extent.

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