New California Legislative Proposal to Increase California’s State Income Tax Rates
Currently, California taxpayers in the highest tax bracket of 13.3% pay the highest income tax rate of any state (California does not have a lower capital gains tax). Assembly Bill 1253 which is now pending in the California state legislature would increase California’s income tax rates even higher. Assembly Bill 1253’s proposal is to tax higher earning California taxpayers by imposing an additional income tax as follows: 1% for taxable incomes over $1,181,484; 3% for taxable incomes over $2,362,968; and 3.5% for taxable incomes over $5,907,420. Thus, the wealthiest California taxpayers would pay a California income tax of 14.3% on their taxable incomes over $1,181,484 and 16.8% on their taxable incomes over $5.907 million. As an example, a California resident earning more than $5.907 million would pay a combined 53.8% tax rate of federal and California income taxes at this highest tax bracket. Additionally, there is the current 3.8% federal net investment income tax under the Medicare rules. Under this proposed California tax legislation in its current form these increased California income tax rates would apply retroactively to January 1, 2020.
If these proposed high California state income tax rates are enacted into law then they will have an especially detrimental tax effect since current federal income tax rules makes state income taxes nondeductible above a $10,000 cap amount.
New California Legislative Proposal to Tax a Client’s Wealth
There was introduced into the California’s legislature a new proposal to impose a tax on the amount of a California resident’s wealth. California currently has no state level estate or inheritance tax, which has been the case since June 1982 when the California state inheritance tax was repealed by a ballot measure. However, in recent years legislation has been introduced (which has never been passed) into the California legislature to attempt to reenact the California inheritance tax. Now, additionally, a new proposed wealth tax (to apply to California residents while alive) was introduced on August 13, 2020 into the California State Assembly (but has not been passed) to impose a 0.4% annual tax on a resident’s worldwide net worth over $30 million (or $15 million for married taxpayers filing separately). This wealth tax is aimed at wealthy California residents and is intended to be an annual tax based upon a person’s net worth. Under this proposed wealth tax once a person becomes a resident of California, if that person then later leaves the state that person will still have this wealth tax imposed on a fraction of their wealth in excess of $30 million for up to ten (10) years after leaving California (note that there are federal constitutional issues as to whether such a wealth tax would be enforceable if it were ever enacted into law by the State of California). If this wealth tax were enacted, it would discourage wealthy persons from remaining residents of California and would discourage wealthy persons and businesses from moving into the State of California.