Introduction
California is famous for its sunshine, tech giants, and… high taxes. From income to business taxes, many residents and companies wonder why the Golden State carries such a heavy tax burden. This guide breaks down the real reasons behind California’s high taxes and how to plan accordingly in 2025.
California’s Tax Structure Overview
Applicable Code: IRC §1, §11; California Revenue & Taxation Code §§17041, 23151, 6051
California collects revenue from:
- Personal income tax
- Corporate & franchise taxes
- Sales & use taxes
- Excise taxes
- Vehicle license fees
- Property taxes (limited under Prop 13)
It relies heavily on income-based taxes, making high earners and profitable businesses carry more of the load.
Income Taxes: Among the Highest in the Nation
- Top individual tax rate: 13.3% (highest in the U.S.)
- Applies to income over $1M for single filers, $2M for joint filers
- No special rates for long-term capital gains—taxed as regular income
Example:
A single tech executive earning $1.2M pays about $130,000+ in CA income tax alone.
Corporate & Franchise Taxes
- C Corporations: 8.84% corporate tax (Form 100)
- S Corporations: 1.5% of net income (Form 100S)
- LLCs: Flat $800 minimum tax + gross receipts fee (Form 568)
Many businesses also face local business license taxes and city-specific fees.
Sales & Use Tax Burden
- State base rate: 7.25%
- Local add-ons: Push the total rate up to 10.75% in some cities
- Applies broadly to goods and tangible personal property
- Administered by CDTFA, requiring monthly/quarterly filings
Example:
In Los Angeles, buying a $2,000 laptop can cost an extra $215 in sales tax.
Property Taxes vs. Home Values
While California’s 1% base rate under Prop 13 seems low, the median home price exceeds $800,000, inflating tax bills.
Example:
A home purchased for $900,000 in 2024 has an annual tax of ~$9,000 in 2025, plus special assessments.
Why California Taxes Are So High
- Progressive tax model: High-income earners pay more
- Funding needs: Healthcare, education, infrastructure, public pensions
- Voter-approved measures: Prop 98 (school funding), Prop 30 (income tax increase)
- High cost of living: Drives higher state spending
- Lack of broad-based service tax: More pressure on income and sales taxes
Step-by-Step Guide to Manage Your CA Tax Exposure
Step 1: Review your residency and business filing status
Step 2: Explore deductions and credits (e.g., R&D credit, CalEITC)
Step 3: Consider income deferral or entity restructuring
Step 4: Consult on potential relocation or dual residency
Step 5: Stay compliant with CDTFA, FTB, and IRS reporting
Conclusion
California’s high tax rates stem from its reliance on income, sales, and corporate taxes to fund expansive public services. Whether you’re an individual or a business owner, tax planning is essential to reduce exposure and remain compliant in 2025.
Call to Action
Feeling overwhelmed by California’s tax system?
Schedule a meeting with Anshul Goyal, CPA EA FCA, a U.S.-licensed Certified Public Accountant and IRS Enrolled Agent, helping high-income earners and businesses legally reduce tax exposure while maintaining full compliance.
📅 Book your appointment here
FAQs – California Tax System
Q1: Why are California taxes higher than most states?
Due to a progressive tax structure, voter-approved measures, and heavy reliance on high earners.
Q2: Do I still pay CA tax if I move mid-year?
Yes, for the part of the year you were a resident. File Form 540NR.
Q3: Can I register my LLC in another state to avoid taxes?
Only if you do no business in California—otherwise, tax still applies.
Q4: Are retirement accounts taxed in California?
Yes. Distributions from traditional IRAs and 401(k)s are fully taxable.
Q5: Is California planning to add new taxes?
Proposals frequently arise, such as wealth taxes, but are often challenged.
About Our CPA
Anshul Goyal, CPA EA FCA is a U.S.-licensed Certified Public Accountant, IRS Enrolled Agent, and Fellow Chartered Accountant. He’s helped over 2,000 clients save $200M+ in taxes through advanced tax strategies for high-income individuals, corporations, and cross-border entrepreneurs.
Disclaimer
This blog is for informational purposes only and does not constitute legal or tax advice. California tax laws are complex and subject to change. Please consult with a qualified CPA for personalized guidance based on your specific tax situation.