If you’re buying or selling real estate, stocks, or other investments, California’s capital gains tax is a big deal to consider. Using this guide, you can minimize your tax liability in 2024 by looking at the updated laws, rates, and strategies.
Understanding Capital Gains Tax in California
California taxes all capital gains as ordinary income, unlike the federal government, which separates short-term and long-term capital gains. You’ll end up with a bigger tax bill if you do this, so you gotta know how the state calculates these taxes and how you can plan your finances effectively.
In terms of financial planning, this uniform capital gain taxation approach can make a big difference. To minimize potential tax liabilities, it’s important to understand how these taxes are calculated in California. In order to reduce their taxable income, investors and property owners have to consider the impact of these taxes when deciding when to sell assets, structuring their investments, and leveraging deductions and credits. If you’re living in a high-tax state like California, you need to know about the state’s tax code and think about your long-term and short-term goals carefully.
Current California Capital Gains Tax Rates (2024)
Depending on your income bracket, California will impose the following capital gains taxes as of 2024:
| Tax Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
| 1% | $0 – $9,325 | $0 – $18,650 | $0 – $9,325 | $0 – $13,500 |
| 2% | $9,326 – $22,107 | $18,651 – $44,214 | $9,326 – $22,107 | $13,501 – $32,645 |
| 4% | $22,108 – $34,892 | $44,215 – $69,784 | $22,108 – $34,892 | $32,646 – $54,535 |
| 6% | $34,893 – $48,435 | $69,785 – $96,870 | $34,893 – $48,435 | $54,536 – $78,448 |
| 8% | $48,436 – $61,214 | $96,871 – $122,428 | $48,436 – $61,214 | $78,449 – $99,109 |
| 9.3% | $61,215 – $312,686 | $122,429 – $625,372 | $61,215 – $312,686 | $99,110 – $501,250 |
| 10.3% | $312,687 – $375,222 | $625,373 – $750,444 | $312,687 – $375,222 | $501,251 – $625,372 |
| 11.3% | $375,223 – $625,370 | $750,445 – $1,250,740 | $375,223 – $625,370 | $625,373 – $1,000,000 |
| 12.3% | $625,371+ | $1,250,741+ | $625,371+ | $1,000,001+ |
| 13.3% | Additional Mental Health Services Tax on Income Over $1,000,000 |
As a result of California’s progressive income tax structure, higher earners pay a bigger percentage of their income in taxes. The state’s top marginal income tax rate of 13.3% is the highest in the nation.
Federal vs. State Capital Gains Tax
While the federal government differentiates between short-term (assets held for less than a year) and long-term (assets held for more than a year) capital gains, California treats them all as ordinary income. Long-term capital gains are taxed at a lower rate (0%, 15%, or 20%), depending on your income, whereas California’s approach may significantly increase your total tax liability.
Calculating Capital Gains in California
- Identify the Asset: Determine whether the asset sold is subject to capital gains tax.
- Determine the Holding Period: Classify the gain as short-term or long-term based on how long you’ve held the asset.
- Calculate the Gain: Subtract the original cost (including improvements) from the selling price to determine your gain.
- Apply the Tax Rate: Your gain will be taxed as part of your total income, at the appropriate rate based on your tax bracket.
Effective Strategies to Reduce Capital Gains Tax
- Tax-Loss Harvesting: By selling assets that have decreased in value, you can reduce your taxable gains. This is especially helpful at the end of the year.
- Maximize Retirement Accounts: Tax-advantaged accounts, like IRAs and 401(k), can help you defer taxes on your gains. Traditional retirement accounts let you defer taxes until withdrawal, while Roth accounts let you withdraw tax-free.
- 1031 Exchanges: You can defer taxes by reinvesting the proceeds in similar properties. This strategy is popular with real estate investors looking to diversify their portfolios without owing immediate taxes.
- Gifting Assets: Consider gifting appreciated assets to family members in lower tax brackets. By transferring ownership, the recipient pays taxes at a potentially lower rate when they sell the asset. However, be mindful of gift tax rules that may apply.
- Charitable Contributions: In addition to reducing your tax liability, you get a charitable deduction for the fair market value of the asset if you donate appreciated assets to a qualified charity. High-income earners can really benefit from this strategy.
Changes in California Tax Law for 2024
Several changes have been proposed for 2024 that could impact capital gains taxes in California:
- Increase in Top Marginal Tax Rate: High earners, particularly those with substantial capital gains, could be hit hard by proposals to increase the top marginal tax rate beyond 13.3%.
- Expanded Tax Credits: California might expand or introduce tax credits to ease the burden on middle- and low-income earners. These credits could offset some capital gains taxes.
- Green Investments: Tax incentives are growing for green investments. Green bonds and renewable energy projects might qualify for preferential treatment.
Navigating Capital Gains in California
If you’re in a high-income bracket, California’s capital gains tax can make a big difference. Using effective strategies and understanding the nuances of these taxes can help you reduce your liability. Whether you’re using retirement accounts or 1031 exchanges, careful planning is crucial.
Staying informed and consulting a tax professional can ensure you’re making the right financial decisions. By being proactive and strategic, you can navigate California’s complicated tax landscape and keep more cash.
Get Expert Help: Get in touch with Bornazyan & Bornazyan LLP today and learn more about how California’s capital gains tax affects you and how we can help you minimize your tax liability. A capital gains accountant will help you maximize your return and keep up with the current tax code.
