30:["$","$L31",null,{"category":"$32","relatedArticles":[{"id":"cG9zdDoyNDkyNjY=","databaseId":249266,"postId":249266,"author":{"node":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":{"url":"https://secure.gravatar.com/avatar/04483497dbd73f712b504e401c9c7d22?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Mark Henricks has reported on personal finance, investing, retirement, \r\nentrepreneurship and other topics for more than 30 years. His freelance \r\nbyline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"William","fullName":"Mark Henricks","lastName":"Henricks","name":"Mark Henricks","postCount":{"pageInfo":{"offsetPagination":{"total":766,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mhenricks","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTUwNg==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19506,"categoryId":19506,"link":"https://smartasset.com/tax-planning/articles","name":"Tax Planning","postCount":{"pageInfo":{"offsetPagination":{"total":79,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"tax-planning","ancestors":{"nodes":[{"name":"Taxes","slug":"taxes","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Taxes","id":"dGVybToxMzY=","slug":"taxes","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$33","date":"2024-05-31T17:29:22","excerpt":"

\n","featuredImage":{"id":"cG9zdDoyNDk5NzU=","databaseId":249975,"altText":"Nonqualified retirement plans allow participants to defer a portion of their compensation, potentially reducing current income tax liability.","date":"2024-05-31T10:05:36","fileSize":198414,"mimeType":"image/jpeg","modified":"2024-05-31T15:11:24","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/05/iStock-1455943818-1.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-5-31","readable":"May 31, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxOTc=","databaseId":197,"userId":197,"avatar":{"url":"https://secure.gravatar.com/avatar/00cb0f465693d78173a61b56cc33e2fd?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Marie White is a Writer/Editor for SmartAsset. She holds an English degree from Stevenson University, with a focus on writing and communications. 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If you inherit or plan to bequeath a certificate of deposit (CD) as part of your estate, there may be tax consequences to consider. Three kinds of taxes could apply: income, estate and inheritance. While the principal amount of the CD transfers without income tax issues, any interest earned after death and before transfer will be treated as ordinary income on the tax return of the person who inherits it. Federal estate taxes won’t apply unless the size of the estate, including the CD, exceeds the generous federal exemption, and there is no federal inheritance tax to be paid by the heir. Several states have inheritance and estate taxes, and these generally have much lower thresholds for exemption, so they may come into play. Setting up the CD to transfer on death will help avoid probate, but won’t affect taxes. Let’s take a closer look at the tax consequences of inheriting a CD.

","

If you have questions, consider asking a financial advisor for help preparing your estate plan or handling any potential taxes on an inherited CD.

","

CD Inheritance Basics

","

A CD is a fixed-income savings tool offered at many banks and credit unions. It allows a saver to set aside a specific amount of money for a specific length of time ranging from weeks to years and, in return, earn a pre-set rate of interest. Federal deposit insurance makes CDs as safe as anything you can do with your money. However, CD interest rates, while often higher than a savings account, are likely to lag behind inflation. And there may be a penalty if you withdraw money before the end of the term.

","

Many savers and investors appreciate CDs for their safety and convenience. They may well be part of your estate. Or, if you’re going to inherit a CD from someone, you may be faced with the potential tax consequences. CDs can present tax complications depending on factors such as the size of the CD and where the deceased and heir reside.

","

Inherited CD Tax Considerations

","

Three types of taxes may come into play when you’re looking at the tax consequences of inheriting a CD: income, estate and inheritance taxes. The first of these is the one most likely to be encountered, but likely won’t be a major cost. The second may be relevant, but probably only to a small number of cases. The third is least likely and will be the responsibility of the heir who receives the bequest.

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Income Tax

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","

The IRS does not regard the value of an inherited CD as taxable. That is, if you receive a $10,000 CD, you won’t have to increase your reported income by $10,000. The interest on the CD is another matter, however. Interest earned before the deceased’s death is not considered income to the recipient of the CD. However, income earned by the deposit after the death is regarded as ordinary income taxable at the recipient’s usual tax rate. Because of the relatively modest interest rates paid by many CDs, the tax bill on interest earned is unlikely to be much except in the case of an unusually large CD inheritance.

","

It is worth noting that many banks will waive the early withdrawal penalty if the inheritor of a CD wants to withdraw funds before the term of the deposit is up. And, if the bank does charge a penalty on an inherited CD, the recipient of the bequest can likely deduct the amount of the penalty from taxable income for that year.

","

Estate Tax

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Tax law does provide for federal estate taxes on inherited assets, but the tax only applies to estates over a certain amount. Currently, that amount is $13.61 million, so it’s only relevant to relatively few estates. There is no federal inheritance tax.

","

A handful of states also have estate taxes. Some use the same floor as the federal estate tax for their levies. However, a few have much lower thresholds. Oregon, for example, taxes estates over $1 million.

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Inheritance Tax

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A similarly small number of states have inheritance taxes, which the recipient of the bequest has to pay. Only Maryland has both estate and inheritance taxes. Generally speaking, due to their overall rarity and the use of thresholds below which taxes don’t apply, estate and inheritance taxes will not be concerns for most estates or heirs.

","

Transfer on Death

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Some CD owners set them to transfer ownership automatically to a beneficiary on the owner’s death. This can be an effective way to avoid having the CD pass through probate, a process likely to add months or years to the time required to distribute funds to heirs, as well as incurring extra costs. However, transfer on death arrangements won’t affect inheritance or estate taxes on an inherited CD. Nor will they have any effect on taxes that could be due on post-death interest earned.

","

Bottom Line

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","

Passing on a CD as part of an estate involves no major tax consequences in most situations. The most likely tax is the income tax that will be due on interest earned after the death of the person making the bequest. This tax will be paid by the inheritor of the CD. Federal estate taxes only apply on particularly large estates, and most states don’t have estate taxes. There’s no federal inheritance tax, and most states don’t tax heirs, either. However, some states have estate taxes with significantly lower thresholds than the federal level, and at least one state has both estate and inheritance taxes.

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Tax-Planning Tips

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Photo credit: ©iStock.com/visualspace, ©iStock.com/seb_ra, ©iStock.com/AndreyPopov

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\n","featuredImage":{"id":"cG9zdDoyNDA4NDY=","databaseId":240846,"altText":"A woman researching the flat income tax in her state.","date":"2024-03-10T17:40:20","fileSize":507634,"mimeType":"image/jpeg","modified":"2024-03-10T17:46:14","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/03/iStock-1215087157_9b1bdd.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-3-10","readable":"March 10, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. 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While the federal government applies a consistent tax system to every citizen, states have tax rates they set independently from Uncle Sam. States can apply flat taxes, graduated taxes, or no taxes to their residents. If you don’t know about your state’s current income tax system, finding out can help you compare how much you would pay by staying or moving to another part of the country. Here is every state that currently uses a flat income tax and how it could benefit you. If you’re looking for need hands-on guidance with tax planning, a financial advisor could help you lower your tax burden.

","

What Is a Flat Income Tax?

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A flat income tax means that all taxpayers, regardless of their income level, pay the same percentage of their income as taxes. The tax rate remains constant or proportional for all taxpayers regardless of their amount of taxable income.

","

For example, say your state has a flat tax rate of 15%. A taxpayer earning $30,000 would pay 15% of their income in taxes ($4,500), while a taxpayer earning $300,000 would also pay 15% of their income ($45,000). So, while the tax percentage stays the same across income levels, your specific income determines how much you owe in taxes.

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What States Have a Flat Income Tax?

","

For 2024, thirteen states have flat income taxes. They are:

","$62","

Iowa will also join this list in a few years, according to its current legislation. In 2026, the state will shift to a flat tax rate of 3.90%.

","

Flat Tax Rate vs. Graduated-Rate Progressive Income Taxes

","

","

A flat tax rate imposes the same percentage of taxes due on all income levels. While some states have this system, most impose a graduated (or progressive) rate system. The federal government has graduated rates as well.

","

In a progressive tax system, the tax rate increases as income levels rise. Higher-income individuals pay a higher percentage of their income in taxes when compared to those with lower incomes.

","

The United States federal tax brackets for 2024 reflect this pattern. Specifically, the rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The more money you make, the higher taxes you incur because of the raised percentages.

","

A significant point of clarification on the progressive tax system in the United States is that the rates apply to different levels of income. For example, say you’re a single filer with $200,000 of annual income. This means the top portion of your income (all income above $191,950) gets taxed at 32% for tax year 2024. So, only $8,050 receives this tax rate. Looking at the tax table, you see that most of your income is beneath this bracket. The income between $100,525 and $191,950 is taxed at 24%, and so on. So, each tax rate applies to part of your income, with lower percentages applying to lower levels of income.

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Advantages of Flat Income Tax States

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As the example above demonstrates, progressive or graduated-rate tax systems can be complex. On the other hand, a flat tax rate is straightforward and takes the same proportion of income from each taxpayer.

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The key to understanding how a flat state income tax affects you is to evaluate your income and cost of living. For example, Mississippi has a slightly higher income tax rate than Colorado. However, the tax doesn’t apply to the first $10,000 of every taxpayer’s income. Plus, the cost of living in Mississippi is nearly 14% lower than the national average. On the other hand, the cost of living in Colorado has recently skyrocketed, offsetting the advantages that a low flat tax rate might bring otherwise.

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In the case above, a taxpayer with $50,000 of annual income would fare better in Mississippi. Only $40,000 of their income would be taxed, resulting in an annual cost of $1,880. The same income would result in $2,200 in income taxes in Colorado.

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For a comparison, both of these figures are lower than Hawaii, where a single filer with $50,000 of income would pay over $3,100 in income taxes, according to SmartAsset’s Hawaii income tax calculator. In many cases, flat taxes can benefit higher-earning taxpayers more than graduated rates, where the percentages climb with income.

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Downsides to Flat Income Tax State

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A flat income tax can also extract more income from earners with lower wages who need more money for basic expenses. For example, if the federal government switched to a 20% flat tax rate, families with incomes up to $94,300 would pay more taxes than they do currently. So, graduated rates can help keep taxes low for households with modest incomes.

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Some states have graduated systems with forgiving rates that benefit lower-income earners. In the example before, the single filer with $50,000 would pay less income taxes in California – about $1,623 for 2023. The state’s graduated income taxes apply rates of 1%, 2% and 4% in ascending order, allowing taxpayers to keep higher percentages of their wages.

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These brackets allow taxpayers with middling incomes to pay less into the tax system and put more toward housing, food and fuel. Plus, California imposes an extra 1% tax on incomes above $1,000,000 to help fund its mental health services. This way, earners with ample financial capacity help fund programs for earners who may not otherwise afford critical health services.

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Bottom Line

","

","

A flat income tax system, as exemplified by the states that currently employ this approach, imposes a uniform tax rate on all income levels. The simplicity of this model is evident, offering clarity and ease of administration. However, its impact on individuals varies, and the choice between a flat income tax and a progressive tax system is multifaceted. Whether it is advantageous or disadvantageous for taxpayers depends on income, cost of living and specific state regulations.

","

Tax Planning Tips

","$63","

Photo credit: ©iStockPhoto/AJ_Watt, ©iStockPhoto/TuiPhotoengineer, ©iStockPhoto/elenaleonova

"],"experts":null,"link":"/tax-policy/states-with-flat-income-tax","published":{"datetime":"2024-3-11","readable":"March 11, 2024"},"shareInfo":{"title":"What States Have a Flat Income Tax?","origin":"/taxes/states-with-flat-income-tax"},"isNewsArticle":false},{"id":"cG9zdDoyMjA3OTk=","databaseId":220799,"postId":220799,"author":{"node":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":{"url":"https://secure.gravatar.com/avatar/72c05cde57f4d7ee65af27e91a5315c2?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Eric","fullName":"Eric Reed","lastName":"Reed","name":"Eric Reed","postCount":{"pageInfo":{"offsetPagination":{"total":892,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"ereed","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybTo5Mw==","children":{"nodes":[{"name":"401(k)","slug":"401k","__typename":"Category"},{"name":"Annuities","slug":"annuities","__typename":"Category"},{"name":"Healthcare & Living","slug":"healthcare-and-living","__typename":"Category"},{"name":"Legislation & Policy","slug":"legislation-and-policy","__typename":"Category"},{"name":"Medicaid & Long-Term Care","slug":"medicaid-and-long-term-care","__typename":"Category"},{"name":"Medicare","slug":"medicare","__typename":"Category"},{"name":"Other","slug":"other-retirement","__typename":"Category"},{"name":"Pensions & Other Retirement Accounts","slug":"pensions-and-other-retirement-accounts","__typename":"Category"},{"name":"Retirement Planning","slug":"planning-for-retirement","__typename":"Category"},{"name":"Retirement Taxes","slug":"retirement-tax","__typename":"Category"},{"name":"RMDs","slug":"rmds","__typename":"Category"},{"name":"Rollovers & Conversions","slug":"rollovers-and-conversions","__typename":"Category"},{"name":"Roth & Traditional IRAs","slug":"roth-and-traditional-iras","__typename":"Category"},{"name":"Social Security","slug":"social-security","__typename":"Category"}],"__typename":"CategoryToCategoryConnection"},"databaseId":93,"categoryId":93,"link":"https://smartasset.com/retirement/articles","name":"Retirement","postCount":{"pageInfo":{"offsetPagination":{"total":392,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"retirement","ancestors":null,"parent":null,"__typename":"Category"},{"id":"dGVybToxMzY=","children":{"nodes":[{"name":"Other","slug":"other-taxes","__typename":"Category"},{"name":"Tax Credits & Deductions","slug":"tax-credits-deductions","__typename":"Category"},{"name":"Tax Filing","slug":"tax-filing","__typename":"Category"},{"name":"Tax Planning","slug":"tax-planning","__typename":"Category"},{"name":"Tax Policy","slug":"tax-policy","__typename":"Category"}],"__typename":"CategoryToCategoryConnection"},"databaseId":136,"categoryId":136,"link":"https://smartasset.com/taxes/articles","name":"Taxes","postCount":{"pageInfo":{"offsetPagination":{"total":244,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"taxes","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$64","date":"2023-12-04T07:00:00","excerpt":"

You can’t avoid taxes when making a Roth IRA conversion, but there are strategies to reduce your tax burden if the circumstances are right. When you convert money from a pre-tax account, such as a 401(k) or an IRA, to a post-tax Roth IRA, you must pay income taxes on the full value of the […]

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As a spokesperson for SmartAsset, she has been cited by Bloomberg, CNBC, Business Insider, Fox News, The Hill and many more. \r\n\r\nJaclyn was previously an editor for CNET Money, where she covered banking, investing, credit cards and real estate. She also served as managing editor of small business content for Bizfluent, Work.Chron and AZCentral, and as a research consultant for NAPCO Media. As a past real estate licensee and Reatlor®, Jaclyn managed contracts for residential properties, while working closely with first-time homebuyers, investors and mortgage brokers.","additionalMeta":{"expertise":"Financial Planning, Investing, Taxes, Real Estate","__typename":"User_Additionalmeta"},"email":null,"firstName":"Jaclyn","fullName":"Jaclyn DeJohn","lastName":"DeJohn","name":"Jaclyn DeJohn","postCount":{"pageInfo":{"offsetPagination":{"total":57,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"jdejohn","__typename":"User"},"reviewedBy":null,"writtenBy":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":{"url":"https://secure.gravatar.com/avatar/72c05cde57f4d7ee65af27e91a5315c2?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. 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","

You can’t avoid taxes when making a Roth IRA conversion, but there are strategies to reduce your tax burden if the circumstances are right.

","

When you convert money from a pre-tax account, such as a 401(k) or an IRA, to a post-tax Roth IRA, you must pay income taxes on the full value of the transfer. The advantage to converting to a Roth IRA is that withdrawals will be tax-free throughout your retirement. But this may only be worth it if your tax burden on the conversion doesn’t outweigh the benefit.

","

Need help minimizing taxes and planning for retirement? Get matched with a financial advisor today.

","

Eligibility for Roth IRA Conversions

","

In general, you can move funds from any qualified retirement plan to a Roth IRA.

","

Unlike contributions, there are no household income limits on a Roth IRA conversion. This has led to what is called a “backdoor conversion,” in which high-income households contribute to a traditional IRA then convert that money to a Roth IRA. This is legal and effective, but if done repeatedly it will trigger some additional taxes known as the “pro-rata rule.”

","

While your 401(k) would incur taxes with each withdrawal made in retirement, Roth IRA withdrawals beyond age 59.5 are not taxed. Therefore, if you have time left for your assets to grow, or expect to have a higher tax rate in retirement than you do currently, converting to a Roth IRA may net you a more in retirement. However, if you are already very near retirement or expect to have a lower tax rate when you make withdrawals, the conversion may not be worth it.

","

Roth IRA conversions go one way. You can convert a pre-tax account to a Roth account, but cannot convert a Roth account to something like a traditional IRA or 401(k). This is particularly important because it means that you cannot unring this bell once you get your tax bill. Once you make a conversion, you must deal with the taxes.

","

Talk to a financial advisor to figure out a suitable strategy to maximize your retirement income.

","

How to Minimize Taxes On Your Roth Conversion

","

Here, you have $500,000 that you would like to convert to a Roth IRA.

","

If you are holding this money in a Roth 401(k), then you will not owe any taxes on that transaction. These are both post-tax accounts, so you can execute a rollover or transfer with no tax event.

","

If you are holding this money in a pre-tax account, such as a 401(k) or IRA, it gets more complicated. When you move this money, you will add the full value of the transfer to your taxable income for the year. Here, for example, you would add up to $500,000 to that year’s AGI.

","

As a result, it’s often wiser to make a large conversion in staggered, smaller amounts so as not to trigger a huge tax bill and higher tax brackets in a given year. Converting $500,000 in a single year could potentially push your total AGI into the highest federal tax bracket (37% in 2023, plus any applicable state and local taxes). However, if you have time to spread the conversion out over, say, five years, adding $100,000 each year to your AGI may keep you in a lower tax bracket. Depending on how you file taxes and the corresponding thresholds, you could save tens of thousands of dollars with this strategy.

","

A financial advisor can help you determine the best strategy for your assets.

","

Weighing Your Anticipated Retirement Date

","

Beyond that, the biggest issue is when you anticipate retiring.

","

A Roth IRA is one of the most useful tax-advantaged retirement accounts on the market, but that value depends largely on having enough time to make big, untaxed gains. If you plan on retiring in the next few years, you probably won’t see much in tax-free Roth gains to offset the tax bill from the conversion.

","

It’s also important to consider your planned retirement income and tax bracket.

","

The difference between a pre- and post-tax account is when you pay your taxes. With a Roth account you pay up front, with a 401(k) or IRA you pay when make your withdrawals. So a Roth portfolio can lose some advantages if you pay a much higher tax rate while working than you will once you have retired.

","

For example, say that you currently pay a 20% effective tax rate and anticipate a 10% effective tax rate in retirement. You might pay $100,000 on the conversion (0.2 * $500,000) vs. $50,000 over time on the withdrawals (0.1 * $500,000).

","

Now, this is just by way of example. Taxes in reality are much more complicated, but it serves to illustrate the point. If you have the time for your Roth IRA to grow significantly and you expect to be in a comparable tax bracket once retired, this might be a wise conversion. If you do not have time for this account to significantly grow and/or you expect to be in a significantly lower tax bracket in retirement, you might actually pay more on a Roth IRA conversion in the long run.

","

Remember, if you need help with taxes or a retirement strategy, you can get matched with a personal financial advisor.

","

Bottom Line

","

You cannot avoid paying taxes on a Roth IRA conversion. This is a post-tax account, so you must pay income taxes on the money you put in. For large retirement accounts, this makes a conversion complicated. It can be a good idea if you have the money to pay that bill and the time for your account to grow, but be careful not to trigger more taxes in the long run.

","

Roth IRA Management Tips

","$7f","

"],"experts":{"name":"Jim Barnash, CFP","topic":"Retirement","bio":"Jim Barnash is a Certified Financial Planner with more than four decades of experience. Jim has run his own advisory firm and taught courses on financial planning at DePaul University and William Rainey Harper Community College.","imageUrl":"","email":"jbarnash@smartasset.com"},"link":"/retirement/roll-over-500k-to-roth-ira-how-to-avoid-taxes","published":{"datetime":"2023-12-4","readable":"December 4, 2023"},"shareInfo":{"title":"I Want to Convert $500k in My 401(k) to a Roth IRA. How Do I Avoid Paying Taxes?","origin":"/retirement/roll-over-500k-to-roth-ira-how-to-avoid-taxes"},"isNewsArticle":false},{"id":"cG9zdDoyMzI2MTI=","databaseId":232612,"postId":232612,"author":{"node":{"id":"dXNlcjo5OQ==","databaseId":99,"userId":99,"avatar":{"url":"https://secure.gravatar.com/avatar/67b8e9b4ee40c2b36d23ca662b66d02f?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Ashley Kilroy is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Ashley","fullName":"Ashley Kilroy","lastName":"Kilroy","name":"Ashley Kilroy","postCount":{"pageInfo":{"offsetPagination":{"total":530,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"achorpenning","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxMzY=","children":{"nodes":[{"name":"Other","slug":"other-taxes","__typename":"Category"},{"name":"Tax Credits & Deductions","slug":"tax-credits-deductions","__typename":"Category"},{"name":"Tax Filing","slug":"tax-filing","__typename":"Category"},{"name":"Tax Planning","slug":"tax-planning","__typename":"Category"},{"name":"Tax Policy","slug":"tax-policy","__typename":"Category"}],"__typename":"CategoryToCategoryConnection"},"databaseId":136,"categoryId":136,"link":"https://smartasset.com/taxes/articles","name":"Taxes","postCount":{"pageInfo":{"offsetPagination":{"total":244,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"taxes","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$80","date":"2024-01-05T16:19:05","excerpt":"

California is one of the most expensive states to live in – but numerous tax credits can lighten the load for working individuals and families. Specifically, the California Earned Income Tax Credit (CalEITC) can enhance your tax refund from the state. In addition, taxpayers who qualify for this credit often can claim a host of […]

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","

A financial advisor can help optimize your financial plan to lower your tax liability.

","

What Is the California Earned Income Tax Credit?

","

The California Earned Income Tax Credit (CalEITC) is a state-level tax credit for low-to-moderate-income working individuals and families. The CalEITC is modeled after the federal Earned Income Tax Credit (EITC) but is specific to California. As a refundable tax credit, the CalEITC provides a payout if the filer owes no state taxes. Therefore, qualifying California residents always benefit financially from claiming it.

","

The credit amount depends on how many qualifying children the tax filer claims. For tax year 2023, a filer not claiming children will receive up to $285. Filers with one child will receive up to $1,900. Having two children increases the amount to $3,137, and three children raises it to $3,529.

","

Who Is Eligible for the California Earned Income Tax Credit?

","

California residents must meet the following criteria to qualify for the CalEITC:

","

Your annual income must be between $1 and $30,950.
You must be at least 18 years old or be the caregiver of a qualifying child.

","

Additionally, qualifying children must also meet the following criteria:

","

They must be your child, stepchild, foster child, sibling, step-sibling, or a descendant of any of those.
The child must also have the same principal residence as you in California over half of the tax year.
The child must be under age 19 at the end of the tax year.

","

Take note: If you have children who are a full-time students at least five months in a tax year, they can also qualify up to the age of 24. And those who are permanently and totally disabled could be included at any age.

","

How to Claim the California Earned Income Tax Credit?

","

","

You can claim the CalEITC by completing and submitting Form 3514 when you file state taxes. Attach the form to your California Form 540, Form 540 2EZ, or Form 540NR.

","

If you don’t have a Social Security number (SSN), you can provide your individual taxpayer identification number (ITIN). You’ll also need the SSN or ITIN of each of the qualifying children you claim. You’ll also provide your date of birth (if you’re filing jointly, your spouse’s date of birth as well).

","

You should have a clear understanding of your income level and dependent situation before claiming the credit. If you know you’re not eligible but try to game the system by claiming the credit, the state might disqualify you from claiming it for the next 10 years. Remember, the credit is for working households that need help to make ends meet.

","

If you realize you qualified for the CalEITC in past years but didn’t claim it, you might still be able to receive it. California tax laws allow filers to amend tax returns to receive missed credits.

","

Other Tax Credits

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Qualifying for the CalEITC means you may be eligible for other tax credits when you file. First, California also provides a Young Child Tax Credit (YCTC). This credit provides up to $1,117 for households earning up to $30,931 with a qualifying child under six years old. Households with zero income and net losses up to $33,497 can also claim this credit since tax year 2022. Multiple children do not increase the credit amount.

","

Second, the federal earned income tax credit (EITC) works like the CalEITC but with different income thresholds. Basic qualifying criteria from the IRS includes:

","

You earned less than $63,398 in tax year 2023
Your investment income is $11,000 or less for tax year 2023
You must be a U.S. citizen or resident
You need a Social Security number on or before your tax return due date
If you’re separated and not filing a joint tax return, you must meet other rules
You don’t file Form 2555 to exclude foreign earned income
You’re someone else’s qualifying child for the EITC

","

For 2023, the EITC income limits are as follows:

","

# of Children	Single/Head of Household/Widowed filers	Married Filing Jointly	Credit amounts
3 or more	$56,838	$63,398	$7,430
2	$52,918	$59,478	Up to $6,604
1	$46,560	$53,120	Up to $3,995
No children	$17,640	$24,210	Up to $600

","

The federal government also provides a Child and Dependent Care Credit. If you paid for the care of a child under age 13 or a dependent adult, you can receive a $3,000 credit for one dependent or $6,000 for two or more dependents.

","

Similarly, you can claim the Child Tax Credit on your federal taxes. You can qualify for this credit if you have any dependent children under age 17. The credit can lower your taxes by up to $2,000 per child, and $1,600 of the credit is refundable for 2023.

","

Additionally, if you’re furthering your education or claiming a student as a dependent, you may qualify for the American Opportunity Tax Credit, which offers a maximum annual credit of $2,500.

","

Bottom Line

","

","

The CalEITC can provide financial support to low-to-moderate-income working individuals and families in the state. As a refundable tax credit, it ensures that qualifying California residents receive a payout, even if they owe no state taxes. The credit amount varies based on the number of qualifying children claimed, offering significant financial relief to eligible filers.

","

Tips for Claiming the California Earned Income Tax Credit

","$92","

"],"experts":{"name":"Jennifer Mansfield, CPA","topic":"Taxes","bio":"Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice.","imageUrl":"https://d31s10tn3clc14.cloudfront.net/imgs/jennifer-mansfield.png","email":"jmansfield@smartasset.com"},"link":"/taxes/california-earned-income-tax-credit","published":{"datetime":"2024-1-5","readable":"January 5, 2024"},"shareInfo":{"title":"What Is the California Earned Income Tax Credit?","origin":"/taxes/california-earned-income-tax-credit"},"isNewsArticle":false}]}]