USA – CALIFORNIA Law and Practice Contributed by: Jennifer Jordan McCall, Ashley Huh and Matthew Perotti, Pillsbury Winthrop Shaw Pittman LLP
1. Tax 1.1 Tax Regimes Individual Taxation
California imposes a tax on all income to a decedent’s estate if the decedent was a California resident at the time of death. The rule applies regardless of the resi - dence status of the fiduciary or beneficiary. (California Revenue and Taxation Code, Section 17742.) Alternative Minimum Tax California residents are also subject to the 7% Califor - nia alternative minimum tax on the calculated alterna - tive minimum tax income which exceeds an exempt amount, before credit reductions. The California alter - native minimum tax income is calculated starting with the taxpayer’s federal taxable income, then adds back certain deductions which are typically itemised, and adjustments. The existence of long-term capital gains and qualified dividends increases the likelihood that the California alternative minimum tax will apply. There are no exemptions and no phase-outs. (California Revenue and Taxation Code, Section 17062 (b)(3)(A) (iv). See 1.2 Exemptions .) US taxpayers are subject to federal alternative mini - mum tax of 26% or 28%. The US alternative mini - mum tax income is calculated starting with adjusted gross income, then adds back tax preference items and deductions, then is reduced by the alternative minimum tax exemption up to a phase-out amount. The federal alternative minimum tax income includes income from incentive stock options that were exer - cised and state and local tax refunds. Mental Health Services Tax California imposes a 1% Mental Health Service tax on taxable income more than USD1 million. There is no equivalent federal tax. The California Mental Health Services Act of 2020, in which Section 17043 is added to the California Revenue and Taxation Code. (See 1.2 Exemptions .) Estate Taxation The US does not have an inheritance tax, but imposes an estate tax on the assets of a decedent’s estate. The US federal estate tax is calculated based on the fair market value of the assets owned by the decedent at death, net of any debts and applicable deductions and exclusions. It is payable by the decedent’s estate. (See the discussion on exclusions in 1.2 Exemptions .)
The United States imposes an income tax on citizens and residents and certain income of non-resident “aliens”. California (otherwise, CA) imposes an annual income tax based on California residency and based on certain other contacts with California. In 2025, Cali - fornia income tax rates ranged from 1% to 12.3%. An individual is a California resident if he or she is present in California for other than a temporary or transitory purpose, or is domiciled in California, but is outside of California for a temporary or transitory purpose. Residents are taxed on all income, including income which has its source outside of California. Non-resi - dents are taxed only on income which has its source in California, while part-year residents are taxed on all worldwide income received during the portion of the year they were California residents and on California- source income during the portion of the year they were non-residents. California’s residency scheme poses special challenges related to “declared” and “factual” intent to establish residence when clients desire to sever ties with California. The California Franchise Tax Board conducts residency audits regularly. The US annual income tax rates range from 10% to 37%. In addition, there are add-on rates in cer - tain investments. Long-term capital gains and quali - fied dividends may be subject to an additional net investment income tax of 3.8% when net investment income or the excess of the modified adjusted gross income exceeds USD250,000 (married filing jointly), USD200,000 (single), or USD125,000 (married filing separately). Net investment income includes gross income from interest, dividends, non-qualified annui - ties, royalties, and rents that are not derived from the ordinary course of a trade or business, plus net gain from the disposition of property not used in a trade or business. Gross income and net gain (or loss) from a trade or business may be included in net investment income if it is a passive activity or its source is from trading financial instruments or commodities. The net investment income tax is also known as the Medicare contribution tax.
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