Comprehensive Guide to California Taxes: Income, Sales, and Property Tax Essentials

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