California Tax Expansion: Who Pays the Price?

(Image credit: Getty Images)

Some high earners in the Golden State can expect to pay more California tax this year. That’s because the state has eliminated the wage cap on its 1.1% employee payroll tax for State Disability Insurance (SDI).

Gov. Gavin Newsom says the tax expansion will “ensure more low-wage workers, many of them women and people of color, can access the time off they’ve earned while still providing for their family.”

Removing the wage cap will fund an increase in the percentage of wages residents are entitled to while on paid family leave or out of work due to a disability.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

The new California law went into effect on Jan. 1, so some high earners may feel the impacts of the change soon.

California income tax increase for 2024

The payroll tax isn't new for high-earning Californians, but previously, the tax was only imposed on wages up to $145,600. As of the first of this year, workers making more than $145,600 per year will now pay the tax.

Before the tax increase, California was ranked by Kiplinger as the most expensive state for millionaires, and it’s more expensive for 2024. The payroll tax expansion increases the state’s top income tax bracket from 13.3% to 14.4%. The new 14.4% tax rate applies to income over $1 million. That exceeds other notoriously high-tax states by far.

New Yorkers making more than $25 million are taxed at a 10.9% rate.
Hawaii’s income tax bracket maxes out at 11%.
Millionaires in Massachusetts are hit with an additional 4% income tax, but their total state income tax rate doesn’t exceed 9%.

Although Californians with significant investment income will still pay more state tax than other U.S. investors, they are off the hook for the new tax hike. Capital gains will still be taxed at a maximum rate of 13.3% in California this year.

California wealth tax

Some high earners could be in for a double hit this year if lawmakers pass a California wealth tax. The proposed legislation would impose an annual 1% tax on California residents who have a worldwide net worth of more than $50 million ($25 million for married filing separately taxpayers). If passed, an additional 0.5% tax would be imposed on worldwide net worth exceeding $1 billion ($500 million for married filing separately taxpayers), beginning in the 2026 tax year.

Lawmakers will debate the wealth tax on Wednesday, Jan 10. However, the bill needs a two-thirds vote from the State Senate and Assembly to make it onto the ballot, where voters would ultimately decide its fate.

2024 federal income tax brackets

Some high earners in California might feel some tax relief where federal taxes are concerned, though, likely not nearly enough to make up for the state tax hike. The 2024 federal tax brackets have been inflation-adjusted by the IRS.

While the top federal tax bracket remains at 37% this year, that rate only applies to taxable income over $731,200 (if filing jointly) for 2024. For comparison, the 37% federal income tax rate applied to taxable income over $693,750 last year.

Katelyn has more than 6 years of experience working in tax and finance. While she specialized in tax content while working at Kiplinger from 2023 to 2024, Katelyn has also written for digital publications on topics including insurance, retirement, and financial planning and had financial advice commissioned by national print publications. She believes knowledge is the key to success and enjoys providing content that educates and informs.