California Tax Planning in 2025: New Credits & Deductions

Latest Facts & News Hook

• California’s Film & TV Tax Credit Program cap increased from $330 million to $750 million
• Over $6.5 billion in tax credits and bond allocations are available for housing development
• The standard deduction increased to $5,540 for single filers and $11,080 for joint filers
• New sales tax exemptions for data centers to attract AI and quantum computing businesses
• California’s mental health services tax remains at 1% for income over $1 million
• Expanded Paid Family Leave benefits no longer require using vacation time first

The tax rules change every year; however, in 2025, California is set to bring in monumental updates from tax credits and deductions to the tax laws under which you operate your planning.

A good understanding of this can make a considerable difference between what you pay and what you save. If you are still thinking about tax planning as just about filling out the form, then the time has come to rethink your approach.

In this blog post, we will show you the differences, the things that work for you, and how you can make sure that no money is left behind in the coming new year. Read on for California tax planning in 2025.

Understanding California Tax Planning in 2025 Landscape

When you plan your California taxes for 2025, it’s important to understand how the state tax system works, what the current tax rates are, and how state rules fit with federal taxes. This gives you a clear view of how to make good decisions, claim the right credits, and make the best use of deductions.

California’s 2025 Tax Rate Structure

California charges income tax using a series of tax brackets. This means your income is split into parts, and each part is taxed at a different rate. You don’t pay the highest rate on all your income, only on the amount in each bracket.

Here are the tax brackets for a single filer for 2025:

If your taxable income is over $1 million, there is an extra 1% tax on the amount above $1 million. This extra tax supports California’s mental health programs.

For people who file as married filing jointly or head of household, the tax rates stay the same, but the income ranges for each bracket are higher. This means you get wider brackets when filing jointly or as head of household.

Additional Important Details for 2025

• The standard deduction increased. For single filers, it’s now $5,540, and for married couples filing jointly, it’s $11,080. This means you can subtract these amounts from your income before taxes are calculated, lowering your taxable income.
• Your filing status (single, married, or head of household) affects both which tax brackets apply to you and how much standard deduction you get.
• The extra 1% mental health tax only applies to taxable income over $1 million, so most taxpayers won’t pay this.

Key Legislative Changes Affecting 2025 Tax Planning

Here are the most important new tax laws and updates that begin in 2025 and will affect California tax planning in 2025:

1. Bank Fee Changes (AB 2017)

• • As of January 1, 2025, California banks and credit unions can no longer charge fees when an ATM withdrawal is declined because of insufficient funds. This rule is meant to help people avoid surprise bank penalties.

2. Paid Family Leave Rule (AB 2123)

• • Starting in 2025, if you need to take paid family leave in California, your employer can’t require you to use up all your vacation time first. Now, you can get state benefits for things like taking care of a new child or a family health emergency without using vacation days right away. These state benefits may be taxable, so it’s smart to plan for possible extra taxes or ask your employer or tax preparer how they could change your refund.

3. Elective Pass-Through Entity (PTE) Tax Extended

• • California now allows certain small businesses, like partnerships and S corporations, to keep using the PTE tax for five more years (through 2030). This tax helps business owners get around the federal $10,000 cap on deducting state and local taxes. If you own or are part of a partnership or similar business, this option may give you more flexibility and possible savings when you file your individual tax return.

4. Updated Business Tax Terms

• • For 2025, certain laws change how “business income” is defined and how income is measured for out-of-state companies. Now there is a bigger focus on where sales happen, not just where a business is based. This matters most for larger businesses working inside and outside California.

5. Film & TV Tax Credit Funding Raised

• • The annual funding for California’s Film and TV Tax Credit increased sharply, giving more productions a chance to get big tax savings when they film in California.

6. Sales and Use Tax Rate Updates

• • Some cities and counties are rolling out new local sales tax rates as of July 1, 2025. If you make purchases or run a business in these places, check your area’s new rate for the cost impact.

7. End of Clean Energy Credits

• • Many credits for buying electric vehicles or doing energy upgrades to homes will expire after September 30, 2025. If you are planning for these types of purchases, 2025 is the last year to qualify for many of these tax breaks.

California vs. Federal Tax Planning Coordination

California tax rules do not always line up exactly with federal (IRS) rules. Here’s what’s true for 2025:

• Date of Conformity: California usually matches federal tax law only up to a certain date, not automatically. For 2025, California is updating its main “conformity date” to match federal rules as of January 1, 2025, if Senate Bill 711 is fully passed. This means many federal changes from the last decade will also now count in California, but only where California law specifically allows it.
• Selective Conformity and Exceptions: Even with this update, California still picks and chooses which federal rules it follows:
  • For example, California will now match federal rules for research credits and like-kind exchanges (property swaps limited to real estate), but not for interest expense limitations or new federal corporate minimum taxes.
  • California will follow the new federal retirement rules for IRA catch-up contributions and SIMPLE IRA limits.
  • Some energy tax credits from the federal government still will not be recognized at the state level, even if you get them on your federal taxes.
• State-Only Credits: California keeps some unique credits not found federally, like the Young Child Tax Credit and expanded support for low-income families and renters.
• Different Deductions: The California standard deduction remains lower than the federal one, even with increases in 2025. California sometimes limits or fully removes certain deductions and personal exemptions that might be allowed on your federal return.
• Estate and Gift Tax: Federal rules are changing in 2025, with the federal estate tax exemption set to drop after this year. California does not have its own estate or inheritance tax, but rules for inheriting property (like Proposition 19) are unique to California and can affect your tax planning.

Always check both IRS and California Franchise Tax Board rules before claiming a deduction or credit. If you use software, look for California-specific questions, and when in doubt, ask a professional who keeps up with state law. Some strategies will help you at both the federal and state levels, but some will only work for one or the other.

New California Tax Credits Available in 2025

Taking advantage of the right tax credits can mean paying less tax or even getting money back. In 2025, California has made a number of changes and expanded several tax credit programs, which can benefit families, individuals, and businesses in big ways.

If you want to save more or get extra support when working, raising a family, or running a business in California, this is where many opportunities can be found.

California Earned Income Tax Credit (CalEITC)

If you work and don’t make a lot of money, this credit is like a little bonus from the state. It can give you back up to about $3,644, depending on your income and if you have kids. It’s great because it’s refundable, meaning you can get money back even if you don’t owe any tax. This credit really helps low- to moderate-income working families.

Young Child Tax Credit (YCTC)

If you qualify for the CalEITC and have a kid under 6 years old, you get some extra money, up to around $1,154. So, for families with little children, this really helps with expenses just for caring for those young ones.

Foster Youth Tax Credit (FYTC)

Young adults who were in foster care between the ages of 13 and 18 can get a hand here. You have to qualify for CalEITC, too, but this credit is meant to help those transitioning out of foster care as they start their adult lives. The amount can change, but it’s designed to provide some financial support.

Child and Dependent Care Expenses Credit

If you pay someone to look after your child under 13, your spouse, or another dependent so you can work or look for work, this credit helps cover some of those costs. You can get up to half of your care expenses back, max $3,000 for one dependent or $6,000 if you care for more. This helps working parents or caregivers manage childcare costs.

Child Adoption Costs Credit

Adopting a child can be expensive, and this credit helps pay for half the costs, up to $2,500 per child each year. It’s a good way to ease the financial burden for families growing through adoption.

Joint Custody Head of Household Credit

If you are a parent who is separated or divorced and shares joint custody of a child, this credit can reduce your tax. The credit amount is up to $592 per qualifying child. It helps with the extra costs of shared custody.

Credit for Dependent Parent

If you are supporting a parent who does not live with you, this credit can lower your tax. The credit amount is also up to $592. It recognizes the financial help you give to your dependent parent. Note that if you claim this credit, you cannot claim the Joint Custody Credit for the same year.

Renter’s Credit

If you rent your home and meet income limits, you can get a small credit: $60 if you file as single or married filing separately, and $120 if you file as head of household, married filing jointly, or as a surviving spouse. It’s a way the state thanks renters who pay housing costs.

Senior Head of Household Credit

If you’re age 65 or older and qualified as head of household in the past two years and meet income rules, you can get a credit of up to $1,806. This credit helps seniors reduce their tax burden, especially those on fixed incomes.

Motion Picture Tax Credit 4.0

This one’s mainly for the film industry. Producers making movies in California get a credit of 20-25% of their qualified costs. It’s designed to keep film productions local, supporting jobs and the economy. While mostly for businesses, it also helps individuals working in film production indirectly.

Low-Income Housing Tax Credit (LIHTC

This credit helps developers in California build or fix affordable rental homes for people with low incomes. The credits go to projects chosen by the California Tax Credit Allocation Committee (CTCAC). Developers or investors who buy these credits can claim them for over 10 years. The homes must stay affordable for at least 55 years to protect renters long-term. For 2025, there are over $500 million in state tax credits available to support these projects. This credit isn’t for individuals but helps create and keep affordable housing for Californians who need it.

Environmental and Clean Energy Tax Credits

These credits support clean energy projects like solar panels, wind, geothermal, battery storage, and energy-saving improvements. Most of these credits go to businesses or utility customers who install such systems. For example, the federal Residential Clean Energy Credit lets you claim 30% of the cost of qualified clean energy property installed between 2022 and 2032, with no annual or lifetime limit. This credit is non-refundable but can be carried forward if not fully used. These credits help California meet its clean energy goals, benefiting the whole state environmentally and economically.

Business Development Tax Credits

California offers several tax credits aimed at businesses to help create jobs and grow the economy. Here are the main ones you should know about:

• California Competes Tax Credit (CCTC)
  This credit is for businesses that want to come to California, stay here, or grow here by creating jobs and investing money. The credit amount is negotiated and can be very large, sometimes millions of dollars. It’s non-refundable but can be used for up to 6 years if you can’t use it all at once.
• Research & Development (R&D) Tax Credit

This one helps businesses that spend money on research and innovation in California. You can get a credit of 15% of those qualified research expenses. Small businesses with fewer employees might get even more. This credit is non-refundable, but you can carry it forward forever if you don’t use it all right away.

• New Employment Credit (NEC)

This credit helps businesses in certain parts of California with high unemployment. If they hire full-time workers there, they get 35% back of the wages they pay. But they have to show they have more employees now than in a past “base” year. The credit works for up to 60 months (that’s 5 years) per employee. It lowers the tax you owe, but it won’t pay you if it’s more than your tax. If you don’t use all of it at once, you can use it later. Also, businesses have to apply first and get a “Tentative Credit Reservation” from the state for each worker before claiming it.

• Local Agency Military Base Recovery Area Credit (LAMBRA)

This credit is for businesses that hire workers in special military base recovery areas in California. The credit amount depends on the wages paid to those employees.

Maximizing California Tax Deductions in 2025

Lowering your taxable income can save you money and ease the stress when tax time comes. Even small deductions matter because they add up and help make sure you’re not paying more tax than necessary. Here are some common deductions that can quietly add up and help lower your taxable income:

Standard Deduction

For most people, California offers a standard deduction, which reduces your taxable income by a fixed amount. In 2025, this is about $5,540 if you file as single or married filing separately, and $11,080 if you file as married jointly or as a head of household. This helps everyone get a basic tax break without tracking expenses.

Itemized Deductions

Instead of the standard deduction, you can choose to add up your eligible expenses and deduct the total if it’s more than the standard amount. These include:

• Medical and Dental Expenses

You can only deduct the portion of your medical and dental expenses that is more than 7.5% of your federal adjusted gross income (AGI). This means if your big medical bills are above that limit, the excess can help reduce your taxable income.

• Home Mortgage Interest

Interest you pay on your home mortgage is deductible, but only on the first $1,000,000 of mortgage principal. This rewards homeowners by reducing their taxable income.

• Property Taxes

You can deduct the property taxes you pay on your home, but this is capped under the state and local tax (SALT) deduction rules. For 2025, the SALT deduction limit is temporarily increased to $40,000 for taxpayers earning $500,000 or less, up from the previous $10,000 cap. This means if your total state and local taxes, including property taxes, exceed $40,000, you can only deduct up to that amount. This cap phases up by 1% each year from 2026 to 2029, then goes back to $10,000 in 2030.

• Charitable Contributions

Donations to qualified charities or non-profits are deductible if you itemize. In 2025, you can deduct cash contributions up to 60% of your adjusted gross income (AGI). There are no new limits this year, but starting in 2026, only donations exceeding 0.5% of AGI will be deductible for itemizers. Taking advantage of 2025’s rules can maximize your deduction before the tighter limit starts.

• Certain Job Expenses and Miscellaneous Deductions

Some work-related expenses and other miscellaneous costs can be deducted if they exceed 2% of your federal AGI. Not all federal deductions apply to California, so only qualifying ones count here.

• Gambling Losses

You may deduct your gambling losses, but only up to the amount of your reported gambling winnings. For tax year 2025, there is no limit other than this income match, so if you report $10,000 in winnings, losses up to $10,000 are deductible if you itemize. Starting in 2026, the deductible amount will be limited to 90% of losses, but not for 2025 returns.

• Student Loan Interest

California follows federal rules for deducting student loan interest. You can deduct up to $2,500 of interest paid on qualified student loans in 2025. The deduction phases out for single filers with modified adjusted gross income (MAGI) between $85,000 and $100,000, and for joint filers between $170,000 and $200,000. This deduction is allowed even if you don’t itemize on your return.

• Alimony Paid for Pre-2019 Agreements

Suppose your divorce or separation agreement was finalized before January 1, 2019. In that case, you can deduct the alimony payments on your California state tax return, reducing your taxable income by the amount you paid. This rule applies regardless of federal changes. For agreements after 2018, alimony is not deductible on your California return.

Read More → California Property Tax Rates Explained

Strategic Tax Planning Solutions California Residents Need

California taxes can be high, and the rules do not always match federal ones. Because of that, making careful choices about when and how you report income, expenses, and investments can save real money. Here are some useful strategies to think about:

1. Income Timing and Deferral Strategies

The timing of your income and expenses affects how much tax you pay.

• The deferral of bonuses, stock sales, or business income into a year when lesser earnings are reported can prevent one from entering into a higher tax bracket.
• Contributions to retirement accounts, whether full or catch-up, before the end of the year, reduce present taxable income and allow your savings to grow. Retirement planning advisors recommend this as one of the best ways to build on your existing retirement plan, helping to align your savings with future tax considerations.
• Prepaying business expenses or insurance in the present tax year increases your potential deductions.

These simple actions balance the distribution of your taxable income and expenses in order to lessen your tax burden.

2. Multi-State Tax Planning for California Residents

Earning money from other states means you must have an avoidance of double taxation provision.

• California subjects all income to taxation irrespective of the place it was earned.
• However, you may get a credit on your California taxes for taxes already paid to other states.
• The residency status of the taxpayer in California (full or part-year) determines what income is taxed by California.
• Maintaining clear records of where and when income was earned is of utmost importance.

Getting these facts correct means that you will not be overtaxed.

3. Estate and Gift Tax Planning Integration

While California doesn’t have its own estate or gift tax, federal rules still apply.

• You can give $19,000 per person tax-free in 2025 without gift tax.
• Planning how and when you transfer assets as part of your estate planning lowers future estate taxes.
• California’s unique property laws, like Proposition 19, affect the tax on inherited homes.
• Trusts and gifting strategies protect your assets and keep tax bills smaller.

Thinking ahead smooths inheritance for your family.

4. Business Entity and Structure Optimization

Your business classification makes a difference for taxes.

• Various kinds of LLCs, S corporations, and partnerships are taxed in different manners.
• S Corps can help business owners save money through reduced self-employment taxes.
• Choosing the appropriate entity and reporting properly opens the highest credits and deductions.

Making the right choice helps you save money and stay on track.

5. Maximizing Credits and Layering Deductions

Credits and deductions reduce taxes in various ways; combining them benefits most individuals.

• Use California credits like the Earned Income Tax Credit, the Young Child Tax Credit, and the Clean Energy Credits simultaneously.
• Double-check the regulations carefully; income thresholds and allowable expenditures matter.
• If your itemized deductions exceed your standard ones, utilize them to lower your taxable income.

Expenditure and credit timing planning increases savings.

6. Planning for New and Changing Laws

Awareness of law changes avoids surprise and lost opportunity.

• The mental health tax, 1% on incomes above $1 million, remains.
• Paid family leave no longer requires vacation time to be used first.
• The majority of the clean energy credits expire on 30 September 2025.
• Increased local sales taxes occurred in mid-year 2025.
• Corporate tax codes now are based on where the business is located, not where the headquarters is located.

Having plenty of knowledge helps you plan better.

7. Record-Keeping and Compliance

Good records keep you safe and make tax time easy.

• Keep receipts and records of every expense and credit you have.
• Record business expenses, home office expenses, charitable donations, and mileage driven.
• California tax audits are on the rise; it is worth keeping good records.
• Use software or applications to remain well-organized throughout the year.

Timely filing avoids paying extra fees.

Industry-Specific Tax Planning Opportunities

In California, not all industries pay taxes the same way. Each one has its own rules, chances to save, and things to watch out for. Here’s a straightforward look at some important tax planning ideas for a few primary industries in 2025:

Film and Television Production

California offers tax credits for productions that spend money locally. Hiring local talent, renting equipment, and filming in-state can help you save. Even small projects, like animated films, can benefit. Plan your budget wisely to maximize these credits.

Clean Energy and Environmental Businesses

Investing in solar or energy-efficient projects brings tax benefits. Complete these projects by the end of 2025 before credits expire. If you install solar at home, your property taxes won’t increase. For businesses, spreading costs over time can also save on taxes.

Real Estate Investment and Development

Real estate investors can deduct up to $40,000 in property and local taxes. Using LLCs to manage property can help split income and losses for better tax efficiency. Keep track of rental income and be mindful of new inheritance rules to avoid higher taxes.

Technology Startups and Manufacturing

Tech companies can benefit from the California Competes Tax Credit and R&D credits for innovation. Hiring in high-unemployment areas also brings extra tax credits. Monitor where your sales occur, as new rules affect tax application.

Agriculture and Specialty Production

Farmers can save on taxes by investing in energy-efficient or water-saving tech. Clean fuel production and new equipment are also eligible for tax breaks. With stricter rules for claiming credits, it’s essential to keep thorough records and stay informed on property tax laws.

Also Read → Does California Have an Estate Tax? Complete Expert's Guide

Technology and Tools for California Tax Planning in 2025

California’s agencies are providing you with helpful online resources to simplify tax planning and steer clear of errors. They’re free, official, and up to date on the current rules, so you can have confidence the numbers are right.

1. MyFTB – Franchise Tax Board

This is your online account with the Franchise Tax Board. You can sign in or sign up here to view previous years’ returns, view what you owe, pay estimated tax, and view notices mailed to you. It’s also a convenient way to view refunds or change your information.

2. Employer Payroll Tax – Employment Development Department (EDD) tools

If you are an employer or you have employees, the Payroll Tax Calculator and e-Services for Business of the EDD allow you to prepay your payroll taxes prior to making the payments. It also allows you to compute unemployment insurance rates and electronically send payroll reports.

3. Sales and Use Tax Rate Determination – California Department of Tax and Fee Administration (CDTFA)

California sales taxes vary by city. You can use the Sales and Use Tax Rate Lookup Tool by inserting an address and viewing the prevailing rate of tax for sales, purchases, or business planning. The tool is useful if you are in various locations.

It is advisable to use these official sources on a regular basis so that you can identify issues before they arise, better manage your payments, and ensure that you are applying the right rates and rules for 2025.

Maximize Your Tax Savings in 2025 with SWAT Advisors!

The Californian tax system is not as straightforward as it is. With tax laws constantly changing and differing from federal regulations, some will inevitably be overlooked. Now, attempting to be a jack of all trades here will undoubtedly lead to mistakes, overpayments, or even sometimes missed opportunities for saving. That’s why tax planning is more than just completing forms; it involves being aware of regulatory changes before they are implemented, understanding how one decision can impact another, and ensuring the plan aligns with both California and IRS regulations.

A good tax advisor will find savings for you that you were previously unaware of, keep you out of trouble with the state or federal government, and ensure that you claim every credit and deduction that applies to your situation.

SWAT Advisors brings experience, updated knowledge, and a clear strategy to your tax planning. We take the stress out of the process so you can focus on your life and business, knowing your taxes are being handled the right way.

If you want to make 2025 the year you stop overpaying and start making your taxes work for you, reach out to SWAT Advisors today.