California Tax

1. California Tax ACCT 456

2. Introduction (1) Prep Form 540 (2) CASales Taxes and Prop Taxes (local) (3) Personal Inc Tax (and corp) (4) CA v. federal - diffs; assume some knowl of fed (indiv) Law as of + conformity/nonconformity Reading - condensed material (Guidebook)

3. Income Tax • Tax Rate Schedules and Tables • Current Individual Rate Schedules and Tables • Individual Maximum Rate

4. Current Corp Franchise Tax, Inc Tax • Corp max and min • max 8.84% (yrs begin after 96) • S Corps: 1.5% • min: 800 0 1st yr, 0 2nd yr (new C & S) (yrs begin after 99)

5. Combined CA Inc Tax and Fed Inc Tax • Individuals: remember • deduc of CA tax on fed return • upper brackets (phase outs: exemptions, itemized - fed & CA)

6. Return Prep - Formula • RESIDENTS (v. part yr, nonresidents) • Formula - CA now an AGI state basically • start fed AGI + or - modifications to income • + or - modifications to itemized deductions;

7. TI • personal exemption credit(s) • dep exemp credit • other credits

8. Much of Federal Law is Conformed to • e.g. AMT - Sch P • e.g. Kiddie Tax - Form 3800 • Due date 4/15 • paperless ext. 10/15 paym Form 3519

9. Return filing requirements: • Using CA GI & AGI • Single • GI • AGI • MFJ • GI • AGI

10. Resident: • In state other than temporarily or transitorily • 9 months presumption = resident • or domicile in state and outside temporarily or transitorily = resident • see cases and factors

11. Filing Status • usually same as fed • exceptions: spouse different state resident or active military - option

12. Personal & Dep Exemptions: • Credits: • pers - t/p & sp • dependents • reduced if fed AGI> threshold • MFS  1250 x 6 • Single HOH  2500 x 6 • MFJ  2500 x 12 • Blind and/or > age 65 - additional

13. Standard Deductions • single, MFS • MFJ, HOH, QW • Dependent claimed on another return • may elect differently from federal - i.e., standard v. itemized

14. Conformity and Nonconformity and Other Diffs • Conformity or not (Spidell) – failure to adopt fed changes • Other Differences - state policy

15. Modifications - To Fed AGI - (more imp) Schedule CA • Interest on State & Local Obligationss - add back other than CA • Interest of Fed Obligations - subtract • Deprec - post 86 MACRS & 87-92 179, CA = fed (no addition or subtraction) • pre 87 not ACRS for CA but pre ACRS methods • corps still use pre ACRS

16. 179 expense (an example of non-conformity) 87-92 CA & fed same 93-96 CA 10,000; fed 17,500 97-98 CA 13,000 7 16,000; FED 18,000 & 18,500 99-02 CA & Fed same 99 19,000 00 20,000 01-02 - 24,000 03 – 25,000 CA; 100,000 Fed (JGTRRA ’03)

17. Cap G&L - same after 86 (Sch D, 540)(except for depreciation differences) • State income tax refund • subtract if from CA or any other state • rationale: no tax benefit (not deduc’d 540) • Unempl Comp - not taxed (subtract)

18. Social Security - none taxed in CA (subtract if included on federal) (fed formula) • CA lottery winnings - exempt (subtract) • IRA & Keogh - post 86 limits were same so taxable on distrib same if all from post 86

19. Expenses related to tax exempt income (see below) • PAL - rules same (except R/E pros - fed 93) • other G or L (fed 4797) (CA D -1) (rules same)

20. NOL • No CB in CA • 10 yr CF 00-01 55% 02-03 60%, suspended 04 100% • No NOL 91 & 92

21. Modifications – to fed itemized – (more imp) Schedule CA • Need not elect same as fed (itemized or standard)(need not attach Schedule A) • Taxes – state & local inc taxes (incld SDI) NOT deduc (sub) • Attach Schedule A – usually not Not 540A 540 if 1040 attached forms other than A&B (attach on file 1040) If itemized CA, but not fed – mock A

22. Tax Exempt Income Expenses: • fed obligs - not deduct exps bec not incld inc (subtract) • state obligs: - deduct exps (add) (other than CA) bec include in inc • CA (no change) • CA lottery - not deduct expenses (subtract)

23. Itemized Deduc Phase Out • 6% v. fed 3% fed AGI> threshold • single, MFS • H of H • MFJ

24. Credits (more imp) • Order specified • form for each • > 3 attach Schedule P • renters: back in 1998 non refundable • amount • phaseout • 93-97: none

25. Credit - Inc Taxes Paid to Another State • net income tax paid to state (not local) (exclude AMT or like) • if income sourced to other state & taxed also in CA • intangibles producing income = attrib’d to CA only (e.g., out-of-state bank acct of CA resid)

26. Limit - proportion of CA tax • no c/o • Schedule S & copy of other state return

27. Other Credits • Personal & dependency exceptions • Household & dep care credit • Back in 100, % of federal, refundable

28. Teacher Retention Credit • After `99, suspended ‘02 • Teach in elem/sec/vocat sch/in CA, K-12 • Credit Years of service req’d • 250 4 – less than 6 • 500 6 – less than 11 • 1000 11 – less than 20 • 1500 20 or more

29. Limit teacher retention credit:  50% x total x ratio (teacher wages & salary (total AGI) • Ratio  1 • Total tax = pers inc tax: before ests, less all credits except teacher excess unemploym contribs, w/h any refundables

30. Other Items • Excess SDI • (>annual amount) • (>1 employer usually) • Distinguish Contributions (compare federal presidential check off • Estimated Tax

31. Penalties - including minimum • Min pen: $100 or 100% of tax if return not filed w/i 60 days due date • Fail to file: 5%/mo; max 25% • Fail to file: 15%/mo; max 75% (if fraud) • Fail to pay: 5% & ½%/mo • If both file & pay: higher of pay or (file & fail to furnish info)

32. Income Tax Administration - CA • FTB - State Controller, Director Department of Finance, Chair of SBE • FTB & IRS exchange info (CA t/p’s required to report changes to fed return) • Tax return preparers: CPA, PA, CA Bar, EA need not register • Others - register with Dept of Consumer Affairs-Ann fee, bond, (60 hrs, 20 CPE)

33. FTB • issue rulings • audit manual • litigation fees • taxpayer Bill of Rights

34. Change of address • Fed form 8822 • CA 1-800-852-5711 • CA form 3533

35. Deficiencies • FTB determines additional tax due • math error • Jeopardy assessment • estimate income tax + levy • notice of proposed deficiency • denial renter’s credit

36. Protest w/i FTB • w/i 60 days of mailing of notification • signed by t/p or representative • (power of attorney -Form 3520 - need not be admitted or have particular qualifications) • 2 copies of protest + notice suggested • oral hearing - request, branch office, representative

37. Taxpayer Bill of Rts • Recovery of Litigation costs; but 10,000 pen for friv lit • State defense: substantially justified • Also civil action for economic damages • Plus possible reimb of reas fees on appeal to SBE from FTB (discretionary) • And burden shift on appeal to SBE • And more

38. Appeal - to SBE • upon notice of FTB action on protest • w/i 30 days of date FTB notice • 2 copies of appeal • 2 copies of supporting documents (effective 1/1/92-SBE mails to FTB)

39. Requirements - Appeal - SBE • In writing • State: is an appeal • Name of appellants • Amounts, years

40. date FTB notice • facts • points & authorities • portion t/p concede • signature

41. Hearing - SBE • formal • sworn testimony • reps not req’d to be admitted • 30 days for petition for rehearing

42. SOL on assessment: CA SOL for mailing notice v. Fed SOL for assem: • General rule - CA 4 yrs after filing (if ext’d, filing) (if early, from due date ) • Fed 3 yrs from actual filing • Waiver - possible, automatic if fed waiver (runs to 6 mo after fed) • Omit 25% GI - 6 yrs (like fed); False or no return - no SOL (like fed);

43. Fail to report changes or amendment of fed - CA open • if report - 2 yrs from report or CA SOL, whichever later; 4 yrs if out of time to report • T/p document w/i 60 days of assessment SOL - FTB has another 60 days lim: + 60 days

44. No CA mitigation • 3d party record keeper - intervention by t/p to quash subpoena - suspend SOL (like fed)

45. SOL on Collection • 20 yrs (7/1/06) • federal 10 yrs

46. Refunds • claim - usually 540X, individuals • appeal - 90 days from disallowance by FTB, to SBE • SOL - general rule: 4 yrs from last day for filing (w/o extension) or 1 yr from overpayment (later)

47. federal refund SOL: 3&2, from actual filing unless file early • waivers - federal rules differ • 2 yrs from giving notice of amended fed (if >CA general rule)

48. Suit: only after file claim • FTB no rt to appeal adverse dec by SBE

49. Time to file: Later of • 4 yrs from due date return • 1 yr from date tax paid • 90 days from notice FTB action (no action 6 mos - disallowance) • 90 days from notice SBE action

50. Death Taxes (after 6/8/82) • Today - 2 death taxes: estate, GST • = pickup = amount of state credit allowed against fed taxes (state credit on fed 760 phasing out per EGTRRA `01) • previously - CA inheritance tax: 1893 - 6/8/82; CA gift tax 1939 - 6/8/82 • State reaction to EGTRRA `01