California Tax Report
2015 Edition
California Personal Income Tax
Although managing your portfolio is primarily an investment decision, tax considerations must also be taken into account. Accordingly, Morgan Stanley
has prepared this California Tax Report. It is by no means a complete description of California tax law, but it does summarize many of the provisions of
most interest to investors.
On November 6, 2012, California voters passed tax legislation named Proposition 30. It raised marginal rates for individuals with taxable income in
excess of $250,000, $500,000 for married filing jointly, for tax years 2012 through 2018. The income tax increases are reflected in the tables below.
Your Morgan Stanley Financial Advisor is available to discuss investment strategies which take the California tax law into account. Keep in mind
that Morgan Stanley LLC, its affiliates and employees are not in the business of providing tax or legal advice. Clients should consult their personal tax or
legal advisors before making any tax-related investment decisions.
What Are the California Personal Income Tax Rates?1
California officially releases its year 2015 tax rate schedule during the last quarter of 2015. The taxable income amounts shown below are for 2014.
Married Couples Filing Joint ReturnsSingle Taxpayers
(Also Qualifying Widow(er)2 and Registered Domestic Partner)
(Also Married Filing Separately, Estates and Trusts)
If taxable income is:
If taxable income is:
Over:
But not over:
Your tax is:
Of the
amount over:
Over:
But not over:
Your tax is:
Of the
amount over:
$0
15,498
0.00 + 1.0%
–
$0
7,749
0.00 + 1.0%
–
15,498
36,742
154.98 + 2.0%
15,498
7,749
18,371
77.49 + 2.0%
7,749
36,742
57,990
579.86 + 4.0%
36,742
18,371
28,995
289.93 + 4.0%
18,371
57,990
80,500
1,429.78 + 6.0%
57,990
80,500
101,738
2,780.38 + 8.0%
80,500
28,995
40,250
714.89 + 6.0%
28,995
101,738
519,688
4,479.42 + 9.3%
101,738
40,250
519,688
623,624
43,348.77 + 10.3%
623,624
1,039,374
1,039,374
And Over
40,250
50,869
1,390.19 + 8.0%
519,688
50,869
259,844
2,239.71 + 9.3%
50,869
259,844
311,812
21,674.39 + 10.3%
259,844
54,054.18 + 11.3%
623,624
311,812
519,687
27,027.09 + 11.3%
311,812
101,033.93 + 12.3%
1,039,374
519,687
And Over
50,516.97 + 12.3%
519,687
here is an additional 1% tax on taxable income over $1 million (added by Proposition 63).
T
2
To file as a Qualifying Widow(er), you must have a dependent child.
1
Reduction in Itemized Deductions FOR 2015 3
Filing Status
Exemption
Credit
Standard
Deduction
$216
$7,984
Single, married filing separately
108
3,992
Dependent
333
1,000
AGI Threshold
Married, RDP filing jointly, qualifying widow(er)
$352,830
Single, married filing separately
3
Exemption Credits and Standard
Deduction Amounts FOR 2015
176,413
Itemized deductions must be reduced by the lesser of 6% of the excess of the
taxpayer’s federal AGI over the threshold amount or 80% of the amount of itemized
deductions otherwise allowed for the taxable year.
Filing Status
Married, RDP filing jointly and qualifying
widow(er)
What Are the Retirement Plan Contribution and Catch-Up Limits?
IRA
SIMPLE
401(k), 403(b),
457 Plans
Coverdell
ESA
Simplified Employee Pension (SEP)
Profit Sharing or Money Purchase Plans
2015
$5,500 / 1,000
$12,500 / 3,000
$18,000 / 6,000
$2,000 / 0
Lesser of 25% of qualified income or $53,000
2014
5,500 / 1,000
12,000 / 2,500
17,500 / 5,500
2,000 / 0
Lesser of 25% of qualified income or $52,000
articipants 50 years of age or older may contribute the additional catch-up amount shown in this chart. A higher catch-up limit applies to 457 plan participants in the last three
P
years before retirement.
Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth
Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described
herein except as otherwise agreed to in writing by Morgan Stanley. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or
account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.
The tax information herein is based on laws in effect as of December 3, 2014, for use in filing 2015 tax returns in 2016.
©2014 Morgan Stanley Smith Barney LLC, Member SIPC.
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1068170 12/14 CS 8010498 12/14
4
Contribution
Limit / Catch-Up4
What Are the Personal Income Tax Filing Thresholds in California?
You must file a California personal income tax return, Form 540, if either your California gross income exceeds the applicable amount in Table 1 or
your California adjusted gross income exceeds the applicable amount in Table 2 below.
Table 1 — Gross Income more than:Table 2 — Adjusted Gross Income more than:
Age on
12/31/14
Single
Married
Under 65
Number of Dependents
None
One Two or more
$16,047
$27,147
$35,472
65 or older
21,447
29,772
36,432
Both under 65
32,097
43,197
51,522
One 65 or older
37,497
45,822
Both 65 or older
42,897
51,222
Age on
12/31/14
Single
$12,838
$23,938
$32,263
65 or older
18,238
26,563
33,223
Both under 65
25,678
36,778
45,103
52,482
One 65 or older
31,078
39,403
46,063
57,882
Both 65 or older
36,478
44,803
51,463
Married
Under 65
Number of Dependents
None
One Two or more
Interest Income From United States Government and Agency Obligations Is Taxable at the
Federal Level. How Are These Obligations Taxed for California Personal Income Tax Purposes?
Exempt from California Personal Income Tax
• U.S. Treasury Bills, Notes, Bonds
• Federal Land Banks
• U.S. Savings Bonds — Series EE, HH & I
• Federal Intermediate Credit Banks
• Federal Home Loan Banks (FHLBs)
• Banks for Cooperatives
• Financing Corporation (FICO)
• Federal Farm Credit Banks
• General Services Administration
• Student Loan Marketing Association
• Tennessee Valley Authority
• Export-Import Bank of the U.S.
• U.S. Postal Service
• Small Business Administration
• Production Credit Association
• Resolution Funding Corporation (REFCORP)
• ETRs, STRIPs, CATs, TIGRs
• Commodity Credit Corporation
Taxable for California Personal Income Tax
• Government National Mortgage Association (GNMA)
• Federal National Mortgage Association (FNMA)
• Federal Home Loan Mortgage Corporation (FHLMC)
• International Bank for Reconstruction and Development (World Bank)
Is Municipal Bond Income Exempt From California Personal Income Taxes?
Interest on municipal bonds issued by the state of California or by a county, city, town or other local government unit in the state is exempt from
California personal income tax. Interest on bonds issued by municipalities outside of California generally is subject to California personal income tax.
If a Mutual Fund Invests in Either Federal Obligations or California Municipal Bonds,
May a Shareholder Exclude the Interest Attributable to These Obligations?
Mutual fund shareholders may exclude the portion of the distribution derived from interest on either federal obligations or California state or local
bonds if, at the close of each taxable quarter, at least 50% of the value of the fund’s assets are invested in either type of security. State and federal
exempt obligations may be combined for the purposes of meeting the 50% test. Information on whether a fund qualifies for exclusion is available
from the mutual fund company.
How Can I Pay My California Income Taxes Online?
Go to ftb.ca.gov and search for Web Pay. Log in using your social security number. Choose your payment type. Select the date you want the payment
made. Enter your banking information. Get instant confirmation that your request was received.
Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth
Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described
herein except as otherwise agreed to in writing by Morgan Stanley. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or
account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.
The tax information herein is based on laws in effect as of December 3, 2014, for use in filing 2015 tax returns in 2016.
©2014 Morgan Stanley Smith Barney LLC, Member SIPC.
Page 2 of 4
1068170 12/14 CS 8010498 12/14
California offers a free secure online payment system called Web Pay. You can pay now and schedule future payments online.
How Are Qualified Dividends and Capital Gains and Losses Taxed to a California Resident?
Qualified dividends and capital gains are taxable as ordinary income. Capital losses are deductible in full against capital gains. Net capital losses are
deductible against ordinary income up to a maximum of $3,000, with the remaining balance carried forward. There are some differences in California
and federal laws that may affect the amount of capital gain or loss to be reported.
How Does California Tax the Unearned Income of a Child?
California conforms to the provision of the Small Business and Work Opportunity Tax Act of 2007 for taxable years beginning on or after January 1, 2010.
The first $1,050 of net unearned income of a dependent child is tax free. If the child is under age 19, or under 24 and a student, the next $1,050 is taxed at
1%, and unearned income above $2,100 is taxed to the child using the parents’ marginal tax rate (if higher than the child’s rate). All income above $1,050 is
taxed to the child at the child’s tax rate if the dependent child is 24 years of age or older, or 19 years of age or older and no longer in school.
Speak to your tax advisor to determine if and how the California kiddie tax rules may affect your tax.
Does California Provide for an Exclusion on the Sale of a Principal Residence by a
California Resident?
Yes. Under the same conditions as under federal laws, an individual may exclude up to $250,000 ($500,000 on a joint return) of gain if the ownership
and use tests are met.
Are Social Security Benefits Taxable in California?
No. California does not tax social security benefits.
Does California Impose an Estate Tax?
No. Beginning in 2005, because of changes to the federal estate tax, California no longer imposes its own estate tax.
What Is the Federal Estate Tax Treatment of Community Property?
California is a community property state. When a married couple owns property as community property and one spouse dies, the value of one half
of the community property is included as part of the decedent’s estate but 100% of the property receives a stepped-up basis equal to its value on the
valuation date. This is in contrast with joint property ownership where half of the property is also included as part of the decedent’s estate but only that
half receives a stepped-up basis. Note that it is possible for California spouses to own their property jointly as opposed to as community property.
If a California Resident Retires and Moves to Another State, Will California Tax the Pension
Benefits Earned While That Person Was a Resident?
No. California no longer taxes pension and IRA distributions taken by former residents from amounts deferred while they were residents.
Can a California Resident Open a Section 529 Qualified Tuition Program to Help Fund
Future Education Costs?
Yes. Many states, including California, have established qualified tuition programs, also known as Section 529 plans. There is no California tax
deduction for Section 529 plan contributions. Section 529 plan distributions are federal and California state income tax free if used to pay higher
education expenses, such as tuition, room and board, books, supplies and equipment required for enrollment at an eligible educational institution.
For more information about the features of any state’s Section 529 plan, go to www.collegesavings.org.
What are the Rules for Same-Sex Married Couples (SSMCs) and Registered Domestic
Partnerships (RDPs) Filing Status?
With the Supreme Court decision striking down the provision of the Defense of Marriage Act (DOMA), new for 2013, same-sex couples who
are legally married can no longer file federal tax returns using the single filing status. They can either file a joint return or file as married filing
separately. Opportunities may exist for filing amended federal tax returns, clients affected should consult with their tax advisor.
This ruling aligns the federal and California filing status for same-sex married couples, and eliminates the need for same-sex couples to create
a pro-forma federal income tax return prior to preparing their California joint income tax return.
Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth
Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described
herein except as otherwise agreed to in writing by Morgan Stanley. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or
account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.
The tax information herein is based on laws in effect as of December 3, 2014, for use in filing 2015 tax returns in 2016.
©2014 Morgan Stanley Smith Barney LLC, Member SIPC.
Page 3 of 4
1068170 12/14 CS 8010498 12/14
However, the ruling does not apply to California registered domestic partnerships. These couples must still claim married filing jointly or married
filing separately filing status for California income tax purposes, but may not do so for federal income tax purposes. Consequently, the need to
create a pro-forma federal income tax return prior to preparing their California income tax return remains.
How Do California Tax-Exempt Yields Compare to Taxable Yields in Various Federal Income
Tax Brackets for California Residents? 5
Federal Tax Rate
25%
28%
33%
39.6%
39.6%
9.30%
9.30%
9.30%
9.30%
10.30%
State Taxes
Assumed California State Rate
Federal Rate
25.00%
28.00%
33.00%
39.60%
39.60%
Effective Combined Rate
31.98%
34.70%
39.23%
45.22%
45.82%
Taxable Equivalent Multiplier
1.4700
1.5310
1.6460
1.8250
1.8450
Tax-Exempt Yield
5
Taxable Equivalent Yields
2.50%
3.68%
3.83%
4.11%
4.56%
4.61%
3.00%
4.41%
4.59%
4.94%
5.48%
5.54%
3.50%
5.15%
5.36%
5.76%
6.39%
6.46%
4.00%
5.88%
6.13%
6.58%
7.30%
7.38%
4.50%
6.62%
6.89%
7.41%
8.21%
8.31%
5.00%
7.35%
7.66%
8.23%
9.13%
9.23%
5.50%
8.09%
8.42%
9.05%
10.04%
10.15%
ates are estimated based on projections using formulas specified in the Internal Revenue Code and the California Franchise Tax Board. This matrix should be used as a
R
general guideline when determining taxable equivalent yields for municipal bonds. Tax-exempt yields are for illustrative purposes only and do not represent any specific offerings. These tax rates are subject to change. California does have lower tax rates within each federal bracket with relation to income level and type of filing. If state tax rates
are lower than posted, taxable equivalent yields may be lower than the actual number printed. The effective combined rate assumes the taxpayer itemizes his/her deductions.
The factors do not adjust for: the imposition of the 3.8 Medicare surtax, nor the phase-out of itemized deductions, personal exemption phase-out, or the reduction of any
credits that may occur for certain high income taxpayers; the yield to maturity factoring in market discount or market premium, or the effect, if any, of the federal Alternative
Minimum Tax (AMT). There is an additional California tax of 1% on taxable income over $1 million.
Where Can a Taxpayer Obtain More Information on California Taxes?
Information is available from the California Franchise Tax Board by calling 800-852-5711. Information and tax forms are also available online
at www.ftb.ca.gov.
The tax information herein is based on laws in effect as of December 3, 2014, for use in filing 2015 tax returns in 2016.
©2014 Morgan Stanley Smith Barney LLC, Member SIPC.
Page 4 of 4
1068170 12/14 CS 8010498 12/14
Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth
Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described
herein except as otherwise agreed to in writing by Morgan Stanley. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or
account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.