California Taxes Explained for High Earners Moving to San Diego

If you're earning $300,000 or more and considering a move to California, you've probably heard the scary number: 13.3% state income tax. Here's what most people get completely wrong—you're not actually in that bracket. Your effective state tax rate? It's closer to 6-7%.

This guide breaks down the real numbers, the hidden benefits, and what California taxes actually mean if you're considering moving to North County San Diego or questioning whether to leave. We'll cover effective versus marginal rates, deduction strategies, property tax considerations, and the myths that keep circulating about California's tax burden.

Who This Tax Analysis Actually Applies To

This information matters most if you're earning $300,000 or more as a single filer or $600,000+ as a married couple. Whether that income comes from W-2 wages, business income, or investment income, the principles remain largely the same—though the optimization strategies differ.

High-Income Households Considering a Move

This analysis is particularly relevant if you're considering a move to California from another state or questioning whether to leave California for a no-tax state like Texas, Florida, or Nevada. The decision often comes down to understanding what you're actually paying versus what you think you're paying.

When This Analysis Doesn't Apply

If you're under $200,000 in household income, the math works differently—you'll have different considerations and likely won't approach the higher marginal brackets. You can also skip this analysis if:

• You're already committed to staying or leaving regardless of tax implications
• You have primarily capital gains income rather than ordinary income
• Tax burden isn't a significant factor in your relocation decision

For everyone else earning in that $300k-$1M range, understanding your real tax burden is essential for making an informed decision about living in North County San Diego.

Understanding Effective vs. Marginal Tax Rates

The 13.3% number you hear everywhere? That's California's marginal tax rate, and it only applies to dollars above roughly $1,000,000 for married filers. Your effective rate—what you actually pay across all your income—is much lower.

What You're Really Paying at $300k

At $300,000 in household income for married filing jointly, you're paying approximately 6-7% effective state income tax rate, not 13.3%. This is the critical distinction that most people miss when evaluating California taxes.

When you combine federal and state taxes, most $300k+ earners are looking at a combined effective rate of roughly 28-32%—and that's income tax only, not including property taxes, sales taxes, or other assessments.

How Marginal Brackets Actually Work

California's tax system is progressive, meaning different portions of your income are taxed at different rates. You don't pay 13.3% on your entire income—you pay lower rates on the first dollars earned, and only the top slice gets taxed at higher rates.

Most earners in the $300-500k range never even hit that 13.3% bracket. The scary number doesn't apply to your entire income, which is why effective rates are so much lower than the marginal rates that make headlines.

Tax Optimization Strategies for High Earners

With proper planning, your effective tax rate drops even further. The key is understanding which deductions and strategies actually move the needle for high-income households in California.

The SALT Cap Limitation

The State and Local Tax (SALT) deduction is now capped at $10,000 federally, which significantly impacts high earners in high-tax states. This means you can only deduct up to $10k of your state income taxes and property taxes combined on your federal return—a limitation that disproportionately affects California residents.

Mortgage Interest Deductions

If you're buying a $2 million home in North County San Diego, your mortgage interest is only deductible on the first $750,000 of the loan. This is another area where high earners don't get the full benefit they might expect.

Retirement Contributions: The Biggest Lever

Maxing out retirement contributions matters more than almost any other strategy. For 2024, a married couple can contribute up to $46,000 combined to 401(k) plans (including catch-up contributions if over 50).

A $400,000 household that contributes $46,000 to retirement accounts can save approximately $15,000 annually in taxes. This is one of the most powerful and straightforward optimization strategies available.

Child Tax Credits and Phase-Outs

Child tax credits begin to phase out above $400,000 for married filers, reducing benefits by $2,000 per child. This is another area where high earners see diminishing returns compared to middle-income households.

The bottom line: effective tax rates depend heavily on how you structure your income and deductions. Most high earners aren't optimizing this properly, leaving significant savings on the table.

Business Owners and 1099 Earners: Special Considerations

If you're self-employed or own a business, the tax calculation changes significantly—and so do your optimization opportunities.

Self-Employment Tax

Self-employment tax adds 15.3% on the first $160,200 of net self-employment income (for 2023). This covers both the employer and employee portions of Social Security and Medicare taxes, and it's in addition to income taxes.

S-Corp Structure Benefits

Structuring as an S-Corporation—paying yourself a reasonable salary plus taking distributions—can save $10-20,000 annually for many business owners. The distributions aren't subject to self-employment tax, though they are still subject to income tax.

This strategy requires careful documentation and compliance, but for business owners earning $200k+ from their business, it's often worth the administrative complexity.

Pass-Through Deductions

The federal Qualified Business Income (QBI) deduction may apply to pass-through entities, potentially allowing a 20% deduction on qualified business income. However, this phases out quickly for high earners and has numerous limitations.

California Conformity Issues

California doesn't conform to all federal tax deductions and provisions. This creates complexity and often means you're calculating taxes differently for state versus federal purposes. A qualified CPA familiar with California tax law is essential for business owners and high earners.

North County Property Taxes and Hidden Costs

Beyond income taxes, property taxes represent a significant ongoing cost for North County San Diego homeowners—but they're more predictable and often more favorable than you might expect.

Base Property Tax Rates

Property taxes in North County typically run about 1.1-1.3% of assessed value. On a $2 million home, you're looking at approximately $22,000-26,000 annually in property taxes.

Prop 13 Protection

California's Proposition 13 caps annual property tax increases at 2% per year, regardless of how much your home's market value increases. This creates massive long-term savings compared to new buyers and provides predictability in your housing costs.

A homeowner who bought in 2015 might be paying $18,000 annually on a home now worth $2 million, while a new buyer of an identical home pays $26,000. Over decades, this advantage compounds significantly.

Mello-Roos Assessments

Some North County communities include Mello-Roos special assessments, which can add 0.5-1.5% to your effective property tax rate. These fund infrastructure improvements and schools in newer developments.

Always ask about Mello-Roos when evaluating properties. These assessments aren't always obvious in listing information but can add $5,000-15,000 annually to your property tax bill.

Comparing to No-Tax States

While Texas has no state income tax, property tax rates are often 2-3%, significantly higher than California. For homeowners, this frequently narrows or eliminates the perceived tax advantage of moving to a no-tax state.

5 Action Steps to Lower Your California Tax Burden

If you're committed to living in North County San Diego or seriously considering the move, these strategies can meaningfully reduce your tax burden.

1. Meet with a California-specialized CPA. Generic tax advice doesn't account for California's unique conformity issues and optimization strategies. Ask specifically about your effective rate, not just marginal brackets, and get a multi-year tax projection.
2. Maximize all retirement contributions. This includes 401(k), backdoor Roth conversions, HSAs, and any employer retirement plans. For business owners, consider setting up a solo 401(k) or SEP IRA to dramatically increase contribution limits.
3. Evaluate S-Corp structure if self-employed. If you're earning $150k+ from self-employment or business ownership, the administrative complexity of an S-Corp is usually worth the $10-20k annual tax savings. Get proper guidance on reasonable salary levels to avoid IRS issues.
4. Understand your property tax situation before buying. Ask about Mello-Roos, HOA fees, and the total effective property tax rate. Run the numbers on a 30-year projection to understand how Prop 13 protection affects your long-term costs.
5. Calculate your real savings from moving. If you're considering leaving California for tax reasons, run the complete analysis including property taxes, sales taxes, and cost of living adjustments. For most $300-500k earners, the real savings is $20-30k annually, not $50k+.

California vs. No-Tax States: The Real Comparison

The decision to move to or from California often comes down to taxes, but the comparison is more nuanced than most people realize.

Texas, Florida, and Nevada

These states have 0% state income tax, which is genuinely appealing for high earners. However, they make up revenue elsewhere. Texas has property tax rates of 2-3%, compared to California's 1.1-1.3%. Florida has higher sales taxes and insurance costs. Nevada has higher effective sales tax rates and limited housing inventory in desirable areas.

For a $300k household buying a $2 million home, the actual annual savings from moving to Texas might be $20-25k, not the $40-50k that a simple income tax comparison would suggest. That's still meaningful, but it's not life-changing money for most people in this income bracket.

The Net Migration Reality

Despite headlines about California's exodus, high earners leaving California represent only a 2-3% net outflow. Most people who leave cite housing costs and quality of life factors more than taxes. Many who leave for tax reasons later return, having discovered that taxes were only one factor in their overall satisfaction.

Total Tax Burden Comparison

When you account for income taxes, property taxes, sales taxes, and various fees, California's total tax burden for high earners is high but not dramatically different from other high-cost coastal areas. The difference between California and Texas for a $400k household is typically $20-30k annually—significant, but not the six-figure difference some people imagine.

What Actually Matters More

Career opportunities, lifestyle preferences, schools, proximity to family, and quality of life often matter more than the tax differential. A $25k annual tax savings doesn't mean much if you're taking a $50k pay cut or sacrificing career trajectory. Similarly, if the beach, weather, and outdoor lifestyle are important to you, no amount of tax savings makes Texas feel like San Diego.

Frequently Asked Questions About California Taxes for High Earners

What's the real tax rate I'll pay on $400k income in California?

For a married couple earning $400,000, your effective California state income tax rate will be approximately 7-8%, not the 13.3% marginal rate you hear about. Combined with federal taxes, your total effective income tax rate will be roughly 30-33%. This assumes standard deductions and doesn't account for retirement contributions, which can lower this further. The exact number depends on your filing status, deductions, and income sources, so working with a CPA for a personalized calculation is worthwhile.

How much would I actually save by moving to Texas or Florida?

For most $300-500k earners, the real annual savings from moving to a no-tax state is $20-30k, not $50k+. This accounts for higher property taxes in Texas (2-3% vs. California's 1.1-1.3%), higher insurance costs in Florida, and various other cost-of-living adjustments. A $400k household in a $2M North County home might save $25k annually by moving to Texas with a comparable home, but property taxes alone would eat up $10-15k of that difference. Run your specific numbers with both a California CPA and a CPA in your target state.

Does the SALT cap make California taxes worse for high earners?

Yes, the $10,000 SALT deduction cap disproportionately affects high earners in high-tax states like California. Previously, you could deduct your full state income tax and property tax payments on your federal return. Now, you're capped at $10k total, which means a household paying $30k in state income tax and $25k in property tax can only deduct $10k federally. This effectively increased the federal tax burden for California high earners by several thousand dollars annually.

Should I structure my business as an S-Corp to save on California taxes?

If you're earning $150,000+ from self-employment or business ownership, an S-Corp structure can save $10-20k annually by reducing self-employment taxes. You'll pay yourself a reasonable salary (subject to payroll taxes) and take the remainder as distributions (not subject to self-employment tax, but still subject to income tax). The administrative complexity and costs are typically worth it at this income level, but you need proper guidance on reasonable salary levels and compliance requirements. California has specific rules and a minimum franchise tax for S-Corps, so work with a California-specialized business CPA.

How does Prop 13 affect my property taxes in North County San Diego?

Proposition 13 caps your annual property tax increases at 2% per year, regardless of market value increases. When you buy a $2M home in North County, your initial property tax will be approximately $22-26k annually. Even if your home appreciates to $3M over the next decade, your property taxes will only increase by 2% per year, not adjust to the new market value. This creates significant long-term savings and predictability. However, when you sell and a new buyer purchases, their taxes reset to current market value—which is why longtime homeowners often pay dramatically less than new buyers for identical homes.

The Bottom Line: Making an Informed Decision

California taxes for high earners are high, but they're not the 13.3% nightmare that headlines suggest. For most $300-500k households, the effective state rate is 6-8%, and the real savings from moving to a no-tax state is $20-30k annually—meaningful, but not life-changing for this income level.

The real question isn't just cost—it's whether the lifestyle trade-off is worth it. Career opportunities, quality of life, schools, weather, and proximity to family often matter more than the tax differential. Run your specific numbers with a qualified CPA, understand your effective rates and optimization strategies, and make the decision based on your complete financial and lifestyle picture, not just the marginal tax rate.