What California Form 540 (2021) Is For
California Form 540 (2021) is the main individual income tax return for people who lived in California for the entire tax year. If you were a full-year resident, you use this form to report all taxable income, no matter where it was earned, and to figure your California income tax, credits, and refund or balance due.
The form covers wages, salaries, tips, interest, dividends, business and self-employment income, capital gains, pensions, retirement distributions, unemployment compensation, and more. While it resembles the federal individual income tax return, California Form 540 (2021) has its own rules on deductions, credits, and federal COVID-19 relief, so you cannot simply copy your federal results.
When You’d Use California Form 540 (2021)
You use California Form 540 (2021) when you meet California filing requirements as a full-year resident and need to file a state individual income tax return. That includes most workers, retirees, and self-employed residents whose gross income or adjusted gross income is above the state filing thresholds, or who owe specific state taxes.
The original due date for the 2021 return was April 18, 2022, because the usual April 15 deadline fell near the federal Emancipation Day holiday. California automatically gives you an extra six months to file, moving the filing deadline to October 17, 2022, but you still had to pay enough tax by April 18 to avoid penalties. If you later find an error, you file an amended return by checking the “AMENDED return” box, attaching Schedule X, and mailing Form 540X.
Key Rules or Details for 2021
Filing Requirements and Income Thresholds
California requires you to file Form 540 if your gross income or AGI exceeds the state’s filing requirements for your status, age, and dependents. In 2021, a single filer under age 65 with no dependents had to file if gross income exceeded $19,310 or AGI exceeded $15,448. Married couples filing jointly, both under 65 with no dependents, had to file if gross income exceeded $38,624 or AGI exceeded $30,901.
You must file even below those thresholds if you owe alternative minimum tax, recapture taxes, tax on certain retirement distributions, or similar special taxes. Children under 19 and students under 24 with investment income over $2,200 may have to file, even if their earned income is low, so it is important to review the filing requirements carefully.
Tax Rates, Deductions, and Exemption Credits
California’s progressive tax rates for 2021 ranged from 1% on taxable income up to $9,325, up to 12.3% on taxable income over $625,369 for single filers and married filing separately. Your bracket depends on filing status and taxable income, and you compute tax using the state tax tables or rate schedules.
The standard deduction for 2021 was $4,803 for single or married filing separately and $9,606 for married filing jointly, head of household, or qualifying widow(er). California also offers personal exemption credits, but those phase out once your AGI exceeds $212,288 for single or separate filers, $318,437 for heads of household, and $424,581 for joint filers and widows or widowers. These credits directly reduce your tax liability rather than your income.
EITC, YCTC, and 2021 Expansions
The California Earned Income Tax Credit (EITC) is available if you have earned wage income or net self-employment earnings under $30,001. You can qualify even without children, and the credit is refundable, which can create a refund even when no income tax is owed. To claim it, you must file Form FTB 3514 with your return.
The Young Child Tax Credit (YCTC) provides up to $1,000 if you qualify for the California EITC and have at least one child younger than six. The credit phases out for earned income between $25,000 and $30,000. For 2021, eligibility rules for EITC and YCTC were expanded so that taxpayers and qualifying children may use either an ITIN or SSN, which broadened access for more households.
Special 2021 Law Changes and Penalties
California excluded certain COVID-19 relief from gross income, including PPP loan forgiveness, EIDL advances, Shuttered Venue grants, and various state relief grants, while still allowing deductions for eligible expenses in most cases. Some “ineligible entities,” such as publicly traded companies or businesses that did not meet the 25% gross receipts reduction test, had to limit deductions and may need to file Form FTB 4197.
Net operating loss (NOL) deductions were suspended for 2020–2022 for taxpayers with net business income or modified AGI of $1 million or more, though NOLs could still be computed and carried forward with extended carryover periods. Total business credits (including carryovers) could not reduce tax by more than $5 million for those years, with disallowed amounts carried forward. California also enforced an individual health coverage mandate, with penalties computed on Form FTB 3853 for those without minimum essential coverage. Late filing penalties can reach up to 25% of unpaid tax, plus a minimum penalty if filed more than 60 days late, while late payment penalties and daily interest apply until the balance is paid.
Step-by-Step (High Level)
Step 1: Complete Your Federal Return
Prepare your federal Form 1040 first, because many lines on Form 540 start from federal amounts. Having a final federal individual income tax return reduces mistakes when you transfer income, adjustments, and deductions.
Step 2: Gather Records and Prior-Year Information
Collect W-2s, 1099s, records of self-employment income, deduction receipts, your prior-year California return, and estimated tax payment records. Accurate documentation supports your filing requirements and helps you avoid misreporting income or credits.
Step 3: Report Income and Adjust with Schedule CA (540)
Fill in your name, address, SSN or ITIN, and filing status, then report your income on Form 540. Use Schedule CA (540) to adjust for items treated differently under California law, including COVID-19 relief amounts and other federal-state differences.
Step 4: Choose Deductions and Claim Credits
Decide whether to use the standard deduction or itemize, depending on which lowers your income tax more. Then claim personal, blind, senior, and dependent exemption credits, as well as California EITC, YCTC, child and dependent care expenses credit, and renter’s credit if you qualify.
Step 5: Compute Tax, Payments, and Balance
Use the tax table for income under $100,000 or the rate schedules for higher income to compute your tax liability. Total your California income tax withholding, estimated payments, and any 2020 overpayment, then determine whether you will receive a refund or need to pay a remaining balance.
Step 6: Assemble, Sign, and File
Assemble all five sides of Form 540, attach W-2s, 1099s, Forms 592-B and 593, and required schedules like Schedule CA (540), Schedule D (540), or Form FTB 3532. Both spouses must sign a joint return, and you can either e-file or mail to the Franchise Tax Board, with separate addresses for refunds and payments.
Common Mistakes and How to Avoid Them
- Claiming wrong estimated tax payments by not checking MyFTB
- Using federal instead of California amounts for standard or itemized deductions
- Claiming a dependent already used on another return
- Mismatching refund or payment figures when filing an amended past due return
- Adding the wrong W-2 withholding or including SDI instead of only California income tax withheld
- Miscalculating excess SDI instead of using W-2 amounts as issued
- Leaving out required schedules like Schedule CA (540), Schedule D (540), or Form FTB 3532
- Failing to report COVID-19 relief on Form FTB 4197 when required
- Forgetting to sign the return before filing
What Happens After You File
Once you file a tax return, the Franchise Tax Board processes it and matches reported information with employer and agency records. E-filed returns with direct deposit usually result in refunds within about one week, while paper returns can take six to eight weeks before refunds are issued. If there are errors or mismatches, the FTB sends a notice explaining any adjustments.
Refunds may be intercepted under the Interagency Intercept Collection program to pay certain delinquent debts, such as child support, state and federal tax liabilities, or government-backed student loans. The FTB generally has four years from the due date or filing date, whichever is later, to audit your return or assess additional income tax, and longer if there is fraud or substantial underreporting. Keep copies of your return and supporting documents for at least four years, and if you cannot pay in full, contact the FTB about an installment agreement to avoid more severe collection actions.
FAQs
What is the difference between California Form 540 and Form 540 2EZ?
Form 540 2EZ is a simplified individual income tax return for people with straightforward situations, such as wages and simple investment income, using the standard deduction and only basic credits. Form 540 is the full version for taxpayers with more complex income, itemized deductions, multiple credits, or adjustments to income.
Can I claim the California EITC if I do not have children?
Yes. You may qualify for the California Earned Income Tax Credit if you have earned income below $30,001, even without children. You must file a tax return and include Form FTB 3514 to compute and claim the credit.
How are PPP loan forgiveness and other COVID-19 grants treated on my 2021 return?
California generally excludes PPP loan forgiveness, EIDL advances, and certain venue or microbusiness relief grants from gross income, and allows deductions for related expenses in most cases. If you are an ineligible entity, or you received these benefits, you may need to report them on Form FTB 4197 to show how you applied the special rules.
What is the Net Operating Loss suspension for 2021?
For tax years 2020 through 2022, California suspended NOL deductions for taxpayers with net business income or modified AGI of $1 million or more, except for certain disaster losses. You can still calculate your NOL and carry it forward, and the carryover period is extended for the years when you cannot use it.
Do I need health insurance to avoid a penalty on my 2021 California return?
Most residents must have minimum essential health coverage or qualify for an exemption to avoid the Individual Shared Responsibility Penalty. If you lacked coverage for all or part of the year, you may need to complete Form FTB 3853 to calculate any penalty or claim an exemption.
What if I cannot pay the tax I owe by the deadline?
You should still file a tax return on time to avoid the larger late filing penalty. Interest and late payment penalties will apply to any unpaid balance, but you can contact the FTB to request an installment agreement and spread payments over time.
