Steve Coker, CFP
4 Tax Benefits for California Retirees
It is popular to criticize California for its high taxes, and rightfully so. Californian’s enjoy one of the highest income tax rates, highest sales tax rates, highest fuel tax rates, and more, which is why many retirees choose to leave the state. Nonetheless, for those of us who choose to stay and retire here, there are a few tax laws that help ease the pain in a state where both costs and taxes are near the top. Here is a list of four tax benefits that can really matter for California retirees:
1. Proposition 13: Property Tax limitations
Conceived and passed during a tax revolt in the 1970’s, Proposition 13 sets a maximum annual increase in property taxes at 2%, helping to ensure that those on a fixed income are not ‘taxed out” of their homes as the value increases. The law has been particularly important in California where property values have soared over the past 40 years. Of course, under Proposition 13 property values are reset when the property is sold. As a result, retirees who have lived in their homes for a long period of time, and have a very low tax basis as a result, may want to carefully consider what they are giving up when moving to states such as Tennessee and Florida where there are no income taxes but high property taxes. Purchasing an expensive home in these states can result in an overall tax rate similar to that of a retiree in California.
2. Propositions 60 and 90: Transfer of Tax Base for Persons Age 55 and Over
Propositions 60 and 90 provide for an individual who over age 55 to sell his or her principal residence and transfer the tax base to a replacement property of equal or lesser value. In effect, Proposition 60 and 90 act as a companions to Proposition 13, providing some flexibility for a retiree to move to another property and not lose their low property tax base. There are, of course, strict rules covering these provisions, so do your research or consult a tax advisor if you are considering selling. Nonetheless, this law could provide a huge tax break to retirees.
3. Social Security Benefits are not taxed in California
Happy days! Social Security benefits are not subject to income tax in the state of California! Admittedly, most states don’t tax Social Security, but the rule can make a big difference in California where the tax brackets are very progressive (very low at lower income levels and very high at high income levels). California has ten tax brackets, ranging from 1% to 13.3% and the Social Security exemption can move retirees into a much lower bracket compared to their working years. For example, a retired couple with total income of $140,000, of which $40,000 comes from Social Security, would have an effective California tax rate of around 2.5%, and would pay less than half of the taxes they would have paid without the exemption.
4. California does not have an Estate Tax
Thankfully, California is one of the 38 states that does not have an estate tax, a tax levied against your estate when you die. Somewhat surprisingly, there are no estate taxes in California regardless of the size of the state. Given that the new Federal Estate Tax exemption is over $11 million per person (over $22 million for a married couple) most Californians can avoid the estate taxes completely.
Admittedly, these four tax breaks don’t change the fact that Californians are still taxed at one of the highest rates. However, it can mean that taxes in retirement may not be as bad as many working Californians fear.
For more information about California taxes, and research about how California taxes compare, I recommend taxfoundation.org.
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