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In general, California conforms to federal tax law for the most part. However, any differences between California and federal must be noted in the tax forms in order for you to calculate the California state tax returns correctly. There will be many differences. Your job as the tax preparer is to make sure that you apply credits and deductions to tax income correctly. Familiarize yourself with different deductions and credits which federal allows and what differences, if any, with which the state of California does not conform with. There may be new federal tax laws passed that the state of California has not conformed to yet, and therefore, you may have to make adjustments accordingly. If there is a federal tax deduction or credit, you need to look for the corresponding California state deduction or credit and if there is none, you need to remove it from the California gross income. 

Other items will be affected, such as the procedures for changing the accounting period of foreign corporations owned by U.S. shareholders that are subject to the transition tax under the new Tax Cuts and Jobs Act. Certain 2018 Pension Plan limitations will not be affected by the new tax law of 2017. The new law will not affect tax year 2018 dollar limitations for retirement plans.

The new tax law also affects your tax brackets and other personal tax calculations not only at the federal level but also at the California level. For example, federal tax law for inflation adjustments has changed to the Chained CPI for inflation adjustments. California will continue to use the same California Consumer Price Index it was always used. California does not conform with the new federal Chained C-CPI-U. California uses a stand-alone manner of computing tax brackets and various other amounts annually based on the changes to the California consumer Price Index.

The TCJA tax reform has replaced the existing tax rates with seven new rates. These rates are 10%, 12%, 24%, 32%, 35% and the highest one at 37%. The TCJA tax reform amended section 11(3) to provide a permanent cost-of-living adjustment based on the Chained Consumer Price Index for All Urban Consumers (C-CPI-U). The Cost of living index is modified by Rev. Proc. 2018-18 and it modifies certain 2018 cost-of-living adjustments set forth to reflect statutory amendments made by an Act to provide reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.

California does not conform to the federal new C-CPI-U price index and neither does it conform to the new federal seven tax brackets or tax rates. California has its own individual income tax rates that range from 1 percent to 12.3 percent. There is an additional tax of 1 percent on the portion of the taxpayer's taxable income that exceeds $1,000,000. Consequently, the maximum personal income tax rate for California is 13.3 percent.

The TCJA tax reform section 22021 amends section 63(c)(2) to provide a temporary increase in the basic standard deduction for taxable years after December 31, 2017 and before January 1, 2026. The following are the new basic federal standard deductions.

• $12,000 for single individuals and married individuals filing separate tax returns.

• $18,000 for head of households.

• $24,000 for married individuals filing a joint return and for surviving spouses.

The older or blind individuals will continue to receive an additional amount added to their standard deduction. For those who are age 65 or older, the additional amount is $1,300 for 2018 or $1,600 if the individual is also unmarried and not a surviving spouse.

California does not conform to the federal standard deductions but instead comes up with its own standard deductions. The standard deductions for California are increased every year to allow for inflation using the California consumer price index. The 2017 standard deduction amounts for California are $4,236 for single or married/registered domestic partner filing separately, $8,472 for married/RDP filing jointly, head of household or qualifying widow(widower). The minimum 2017 California standard deduction for dependents is $1,050.

The personal exemption which is normally adjusted for inflation every year has been changed by the TCJA to $0. Inflation works by taking a percentage of the inflation increase, but no matter how you put it, anything percent of $0 will always be $0. This is to remain from January 1, 2018 through December 31, 2026 for your federal tax return. However, this change has no effect on California. California has never conformed with the federal exemption deductions because instead of personal exemptions, California has always used personal exemption tax credits. They work a little different in that they are applied after your tax has been calculated. For tax year 2017 the California personal exemption is $114 for personal exemption, senior or for blind and $353 for dependents. These amounts will be adjusted for inflation in 2018.

In addition, for 2017, the exemption credits are reduced by $6 ($12 if married filing jointly) for each $2,500 ($1,250 married filing separately) of AGI or fraction that exceeds the following threshold amounts:

Single or married/RDP filing separate -  $187,203

Married /RDP filing jointly - $280,808

Head of Household - $374,411

Net Operating Loss (NOL) - What is it? You know that if you own a business you can manipulate your income to certain extent. You can make decisions towards the end of the year that will allow you to also manipulate your tax rate. Again, this is to a certain extent and it is all legal. The correct name for using time to manipulate your tax return is called tax planning. When you use the tools available to you in tax planning, you forecast your tax liability based on all the facts present at the moment and you work on ways to reduce your tax liability. If you need a loss to offset your income and you know that a business will most likely operate at a loss in the first three years, you may want to venture into a new business. Doing this for this purpose may not be totally legal though. The only reason you should ever go into business is to make money. Nevertheless, the goal of starting a business is to make a profit and a loss is just something that happens early on in the start of your new venture. This has to do with all the set up expense at the beginning of the business start-up. You may have an NOL as a result. At the early start of all business there more expenses for necessary items such as marketing.

The federal law changes to simplify the kiddie tax by effectively applying ordinary and capital gain rates applicable to trusts and estates to the net unearned income of a child. Currently taxable earned income of child is taxed according to an unmarried taxpayer's brackets and tax rates and taxable income that is net unearned income is taxed according to the brackets applicable to trusts and estates, which is taxed at preferential tax rates.

Remember that for kiddie tax purposes, we are mainly concerned with unearned income such as income from investments or income that is not income from wages, salaries, professional fees or any amounts otherwise received as compensation for any kind of services rendered.

The new kiddie rules have changed forcing taxpayers to use the trust and estate tax rates structure. This structure is less favorable because it overrides the lower tax rates that would apply to a child's unearned income. This trust and estate tax rate structure is compressed compared to the brackets for single individuals.

These are the special rules that apply to the net unearned income of a child generally referred to as the "kiddie tax." The kiddie tax applies to (1) a child who has not reached the age of 19 by the end of the tax year or the child is a full-time student and under age 24, and either of the child's parents are alive; (2) the child's unearned income exceeds $2,100 (for 2017); and (3) the child does not file a joint tax return. This kiddie tax applies regardless if the child is claimed as a dependent. If the child is over 17, then the kiddie tax applies only if earned income does not exceed one-half of the amount of his or her support.

The suspension of this deduction brings a greater grief than what it appears to be on the surface. One example of this is the deduction for hobby losses. With this elimination, the hobby losses will be eliminated 100%. Many figure that you can take hobby expenses up to the income earned, but this is not true, well, not anymore. With the new tax law, you will be able to deduct zero of your expenses that you had to acquire hobby income. You will see that there are many other items which are affected. Another one of these items that will be greatly affected by this change that seems to be harmless is the office in the home deduction which is no longer available to employees of a company who work from home. It is quite convenient to work from home. The office in the home deduction for employees which was a deduction that you can take about the 2% of AGI is no longer an option. This new tax law has affected items as the 2% of AGI deduction and has caused chaos for many taxpayers on many different platforms.

Be prepared to make adjustments to your California tax return because California does not conform to the federal suspension of all miscellaneous itemized deductions. Neither does California conform to the overall limitation on itemized deductions.

With that said, here is what the 20% pass-through business deduction is about. Be ready to make adjustments on your California tax return. With a TCJA qualified pass-through business income deduction will permit its shareholders to deduct 20% of the business income and will be claimed as a below-the-line deduction for tax purposes. However, the new tax rules do not permit the deduction for high-income "Specified Services" businesses which includes lawyers, accountants, doctors, consultants, and financial advisors. High income individuals may have their QBI deduction limited if they do not employ a substantial number of people relative to the size of the business under the new "W-2 wages" limit. Additionally, they may have their QBI deduction limited if they invest into a substantial amount of property under the "wages-and-property" limit.

The new rules make it easier for a small business to claim at least a modest new QBI deduction and this deduction is available even if the small business is sole proprietorship which means that it is not actually necessary to have an actual business entity like a partnership, LLC or an S-corporation. This deduction is even greater for large scale businesses. On the other hand, a business who primarily relies on the efforts of its owners, whether they are Specified services businesses, or those that have a limited amount of employees or capital investments, may find taking QBI deduction a bit more complicated. Especially noticeable in this case would be individual who are over the new income threshold of $157,500 for individuals and $315,000 for married filing jointly.

The new deduction for pass-through businesses was created by the Tax Cuts and Jobs Act (TCJA) and this deduction can allow you to take a deduction for up to 20% on income from your sole proprietorship, partnership and other business such as S corporations that are pass-through businesses. The amount of the deduction that you can take will vary depending on

• The nature of the business activity.
• The total income of the owner.
• The total payroll amount paid to employees
• How much property the business owns.

There are two classes of businesses taken into consideration for the 20% deduction. First class of business is the business that provides certain personal services such as law firms, medical practices, consulting firms and professional athletes. In the second class category are all the other businesses that are not part of the previously mentioned.

After that, the business owners are divided into three groups such as

• Single owners making less than $157,500 or married filing joint filers making less than $315,000 total taxable income may take the full 20 percent deduction on their business. In this case the kind of business does not matter.
• Single owners making more than $207,500 or married filing joint filers making more than $415,000 will not be allowed any deduction if their business is a personal service firm such as attorney, doctor, consultant or professional athlete and other businesses considered a personal service business. However, other types of business may allow them the deduction.
• The owners who are single making between $157,500 and $207,500 will be allowed a partial deduction. Likewise, business owners who are married filing jointly making between $315,000 and $415,000 will only be eligible for a partial deduction. The kind of business will not matter for the partial deduction but it will phase-out for the personal service firms.

To claim the deduction and the limits on the deduction, the taxpayer must calculate the Qualified Business Income (QBI) which normally the business owners business net income. If the taxpayers QBI is less than $157,500 for single or less than $315,000 for married filing joint filers, then simply multiple that amount by 20 percent and that is the deduction.

The story gets a bit more complicated if the owner owns one of the specified service businesses and is above the $157,500 for single and the $315,000 threshold for married filers. In this case the amount of the QBI is phased-out until it disappears once their taxable income reaches $415,000.

Some businesses personal service firms or not, may have to calculate their deduction for limitations based on a two-part formula. The deduction will be partially limited to the greater of either 50 percent of the wages the business pays to its employees or 25 percent of wages plus 2.5 percent of the basis of the business' qualified property. The business owner then takes the smaller of this calculation and the 20% of their QBI calculation. As with many other deductions in the tax code that apply two calculations, you may only deduct the smaller of the two amounts.

The new pass-through 20 percent deduction is great for all business owners. If you think about it, this deduction is not really a pass-through business deduction but a deduction for all business owners since it also includes sole proprietorships. Maybe what happened was that the original idea was to only offer this deduction for pass-through entities such as corporations, but later at the end everyone decided to be generous and to also include sole proprietorships in the deal. After all, the TCJA of 2017 was a tax reform that was rushed at the end of the year around holidays when so many are compelled to be highly generous.

Large businesses are probably the ones who will benefits the most. A business which primarily relies on the efforts of its owners, whether they are specified service businesses, or those that have a limited amount of employees or capital investments, may not have too many options for the QBI deduction. There are new income threshold of $157,500 for individuals and $315,000 for married filing jointly. This deduction can allow you to take a deduction for up to 20% on income from your sole proprietorship, partnership and other business such as S corporations that are pass-through businesses. The amount of the deduction that you can take will vary depending on the nature of the activity, total income of the owner, total payroll and property owned by the business. There are two types of businesses which can take 20% deduction. Businesses that provide certain personal services such as law firms, medical practices, consulting firms and professional athletes are in the first category. All others are in the second class category.

Not too long ago, individuals were filing tax returns as single taxpayers although they were technically married. Then, individuals were filing tax returns for federal tax purposes as single and were filing as married filing jointly/RDP for California. According to the Franchise Tax Board code section 297, domestic partners “are two adults who have chosen to share one another’s lives in an intimate and committed relationship of mutual caring.” Both persons must file a Declaration of Domestic Partnership with the Secretary of State. Upon filing this partnership with the state of California, the individuals are given the same rights and responsibilities that are given to married individuals. Thus, with this new ruling, individuals of the same sex can now file joint tax returns just as married individual do. Federal now allows for individuals of the same sex to file jointly. However, with federal there are special requirements to establish the relationship like the state of California requirement to file a Declaration of Domestic Partnership with the Secretary of State. The requirements are usually established with the individual states or countries that allow same sex marriages. The new federal benefit for same sex couples is a result of many states allowing same sex couples to file tax returns as married individuals. Now both California and federal allow for same sex partners to file a joint tax return.

For California tax purposes, you need to know when to use Schedule CA and when to make California adjustments on this schedule CA. Very important to remember that if both the state of California and federal coincide and agree with the tax rules, there are no differences and therefore no need for Schedule CA of Form 540. When California agrees with the federal credits and deductions it is considered conformity. California tax laws conform to the federal tax laws for the most part. When you file tax returns you have to file a tax return for federal and also a tax return for California. California is one of the fifty states which require the filing of a tax return. There are only seven states which don’t require filing of a tax return and California is not one of these states. We’ll mention them here: These states are Alaska, Florida, Nevada, South Dakota, Texas, Washington (state) and Wyoming. If you prepare tax returns in one of these seven states, you don’t need to worry about filing a state tax return. Even if you live in California, you’ll get a few of those. You know, this is the type of taxpayer who moves from state to state. At times, your client, the taxpayer, may have lived part of the year in California and the other part in another state. Therefore, knowing which states don’t require filing a tax return is good to know and can save you some research time. If you know this, you only need to worry about filing the federal return for this state or for part of the year the taxpayer lived in that no income tax state. California is one of the states that require the filing of a state tax return.

California conforms to the federal rules that treat a qualified hazardous duty area as if it were a combat zone for purposes of applying IRC section 2(a)(3), relating to a special rule where a deceased spouse was in missing status; IRC section 112, relating to certain combat zone compensation of members of the Armed Forces; IRC section 692, relating to income taxes of Armed Forces members upon death; and IRC section 7508 relating to time for performing certain acts postponed by reason of service in combat zone. Qualified hazardous duty areas are Bosnia and Herzegovina, Croatia, or Macedonia. California does not agree with the new federal provisions of including Sinai Peninsula of Egypt as a qualified hazardous duty area.

California does not agree with the federal provision regarding the estate tax provision applicable to members of the Armed Forces dying in a combat zone or by reason of combat-zone-incurred wounds, etc., under IRC section 2201. California also does not conform to allowing a joint return where an individual is in missing status, under IRC section 6013(f)(1).

If you have to prepare a tax return involving a soldier, you need to find out everything you need to find out about soldiers and military pay. When preparing returns with military pay situations you will most of the time have to deal with nonresident and part-year resident taxpayers. In some situations, the military taxpayer may have lived in California all year but not be liable for California taxes. Other times, the taxpayer may be liable dependent on when the soldier entered the military and when he or her started living in California. As a rule, the military taxpayer is considered a resident of the state from which he or she entered the military. The individual does not lose his or her residence or domicile in any state when in compliance with military orders. Likewise, the person does not acquire a new residence or domicile by being in compliance with military orders. Some will be full-year residents, others will be nonresidents and still others will be part-year residents. If you have to file a nonresident California tax return you would have to use Form 540NR. You would use this Form for either a short form or long form California tax return. Active duty military members is included in your California income calculations as taxable income to California only if the military taxpayer is domiciled and stationed in California and the pay is earned in California. The military taxpayer could be living in California but not be domiciled in California. An individual could be domiciled somewhere else if somewhere else is where they do business such as their banking and where they pay a mortgage and where they have their vehicles registered. Being a soldier sometimes involves coming to California from another state and this does not necessarily mean that this soldier is a California resident.

Well, now that the new TCJA suspends the deduction for moving expenses for taxable years 2018 through 2025, you still need to keep these rules handy for claiming your moving expense deduction with California. Besides, you need to use the same rules in mind when you allow a deduction for members of the Armed Forces on active duty that move pursuant to a military order and incident to a permanent change of station because federal still allows a moving expense deduction for the military.

California does not conform to the suspension, but will continue to conform to the federal rules for allowing moving expense deductions as before the federal suspension.

For the most part, sick pay is not taxable, but it could be. Do your homework and make sure that your sick pay is not taxable before you decide not to include on your federal tax return. If you received sick pay benefits, you must report the amount received for personal injury or sickness if the insurance was paid for by your employer. Amounts received from plans paid for by you are usually not taxable for federal tax purposes. If both you and your employer paid for the plan, only the amount received that pertains to what your employer paid is taxable. However, this is true only for your federal tax return. California does not tax any income received due to sick pay under the Federal Insurance Contributions Act or the Railroad Retirement Act. This also holds true for any social security benefits you receive. These amounts must be adjusted on Schedule CA of Form 540. Usually you show an adjustment for any of these amounts since they are not taxable for your California tax return on line 7, column C of Schedule CA of Form 540 or 540NR. You know how these could be taxable on your federal tax return depending on who paid for the plan? Well, for California, it does not matter if the amounts are taxable or nontaxable for federal tax purposes, or if the employer paid for the plan or not, the amounts are nontaxable for California regardless. Therefore, whatever amount that pertains to qualifying sick pay that was included on the federal tax return must be excluded from your California tax return by using Schedule CA. California excludes from income any kind of sick pay that is included on your federal tax return. Then exclude this amount from your California tax return since it is not a taxable item for California.

U.S. tax treaties are there for a reason and usually they benefit people who have a stake in other countries. The United States goal is to have strong relations with other countries. Everyone is better off with more friends who will hopefully be there for you in case of trouble. The U.S. has treaties with several countries. Usually part of the various treaties is to offer tax breaks to residents of that country who derive income from the United States. The treaties listed usually state which breaks are to be allowed and along with that declaration there is usually the tax savings that will be received by the resident of those countries with which the United States has treaties. If no treaties exist between the United States and the country the resident of that country who is doing business and deriving income from the United States, that individual will have to pay taxes accordingly by filling our Form 1040NR. Most individual U.S. states honor the treaty provisions that the United States may have with the certain countries. However, California has certain limitations and income derived that is normally exempt by U.S. treaties could be taxable for California. Any income derived that is normally exempt by U.S. treaties may be excludable for California only if it is specifically stated in the treaty that the income is exempt income from state income tax. Remember, California taxes adjusted gross income from all sources. Once you figure the amount to be excluded from federal that is not excludable for California, enter is on line 7 of Schedule CA of Form 540 or Form 540NR. Tax matters that have to do with the United States doing business internationally will be most of the time be a nonconformity item for California tax purposes.

Ridesharing saves the taxpayer a lot of money and it also saves a lot of headaches for many drivers trying to get to and from work. Under federal tax law, if you give your employee transportation money that is so small that it is impractical to keep track of it in your accounting records, you can exclude it from income. This is considered a de Minimis transportation benefit. There are other qualified transportation benefits. You can exclude from income any benefits you received such as a transit pass, qualified parking, rides in commuter highway vehicles between employee’s home and the work place and qualified bicycle commuting reimbursements. Transit passes qualify only if a voucher is readily available for direct distribution and from a voucher provider who does not impose fare media charges or other restrictions. Qualified bicycle commuting reimbursements cannot be excluded if the reimbursements are provided in place of pay. A commuter highway vehicle is a vehicle which seats at least six adults besides the driver. Qualified parking is parking you provide to your employee on or near your business or parking on or near the place your employee take public transportation such as public parking near the bus or train station. This is true as long as the parking is not near the employee’s home. This is quite obvious, the parking should not be near your home and there is probably a mention in the tax rules for this because some taxpayers have already tried doing this. 

When you own stock in a company, you become a stakeholder in such company in the hope that someday you will get paid for your efforts. Getting paid in more stock is fine too, as long as you do get paid. Some companies give you the option to get paid with stock instead of a check. When you report the income that you did not receive depends on when you received the option, when you exercise the option, or on when you sell the stock received. Getting paid with qualified stock options is considered a stock option. There are statutory stock options and nonstatutory stock options. If you receive a statutory stock option, you normally don’t include any amount in your gross income when you receive or exercise your stock option. However, if you are granted a nonstatutory stock option, you may have to include the amount in income, but this would depend on whether the value of the option can be readily determined. If the option is traded on an established market then this should not be any problem. However, most nonstatutory stock options are not readily determinable so you must include in income the fair market value of the stock received when you exercise the option or when you sell the stock received.

Qualified stock does not include any stock if, at the time the employee's right to the stock becomes substantially vested, the employee may sell the stock to, or otherwise receive cash in lieu of stock from the corporation. Qualified stock can only be such if it related to stock from options or RSUs, and does not include stock received in connection with other forms of equity compensation which includes SARs or restricted stock.

A corporation for qualified stock options is an eligible corporation with respect to a calendar year if (1) no stock of the employer corporation (or any predecessor) is readily tradable on an established securities market during any preceding calendar year, and (2) the corporation has a written plan under which, in the calendar year, not less than 80 percent of all employees who provide services to the corporation in the United States are granted either stock options, or RSUs, with the same rights and privileges to receive qualified stock ('80 percent requirement).

The provision requires that a corporation that transfers qualified stock to a qualified employee must provide a notice to the qualified employee at the time the employee has complete rights to the qualified stock and it is substantially available to the employee.  The notice must (1) certify to the employee that the stock is qualified stock, and (2) notify the employee (a) that the employee may (if eligible) elect to defer income inclusion with respect to the stock and (b) that, if the employee makes an inclusion deferral election, the amount of income required to be included at the end of the deferral period will be based on the value of the stock at the time the employee's right to the stock first becomes substantially vested, notwithstanding whether the value of the stock has declined during the deferral period (including whether the value of the stock has declined below the employee's tax liability with respect to such stock), and the amount of income to be included at the end of the deferral period will be subject to withholding as provided under the provision. Federal law states that failure to provide the notice may result in a penalty of $100 for each failure and subject to a maximum penalty of $50,000 during the calendar year. California does not conform to IRC section 3402 relating to income tax collected at the source, but instead has stand-alone rules relating to income tax withholding. California does not conform to IRC section 3401 relating to wage withholding. The Employment Development Department (EDD) administers California's wage withholding program.

Native Americans have endured many prejudice situations. In a way it is good that Native Americans are also subject to taxation for federal tax purposes. At least if Native Americans pay taxes, hopefully the prejudice towards them will stop. Earnings of American Indians are subject to federal taxation and many of the taxation rules are specifically written for them. Federally recognized tribes are their own legal entities established similar to the way states are established. They are set up like states and are given rights similar to rights given to state entities. Therefore, similar to the residents of the states, the residents of the Indian tribes are liable for taxes just as other residents. Income received by Indians from reservations sources is usually taxable for federal tax purposes. However, California does not tax the income of tribal members who live in Indian reservations and who receive income from their tribal sources. Any income received for services performed by tribal members while living or being domiciled on their reservation is nontaxable for California tax purposes regardless of who paid it. If the earnings from a Native American are taxable by federal you must make them excludable by California by entering them on line 7, column B to exclude them from the total income reported to California. The earnings of American Indians are usually subject to federal taxation similarly to income of residents from the fifty U.S. states, but are usually not subject to California taxation and therefore it must be subtracted from your California gross income total. It is important to note that if the Native American is not domicile or residing in a reservation, he or she will owe California tax. In this case the income would be the same as the federal amount and just transfer over from the federal tax return to the California tax return. There are many rules in place for Native American when it comes to California taxation matters. California taxation of natives is based on whether the Native American lives in or outside of the reservation.

Ministers and religious leaders can be found everywhere. These religious leaders are there to provide guidance to individuals who seek advice. Usually if there is family crisis, the family will go to these religious leaders to help them get through it and hopefully find solutions. It seems that everywhere you look there is a minister from one religion and another religion. For federal tax purposes a minister may be exclude from the income the fair rental value of a home or housing allowance plus utilities provided as compensation for his or her ministerial services. The minister needs to report the income received from the religious organization for his or her services. If the minister is self employed, he or she can file an application so that he or she does not have to pay social security tax on his or her self employment income. In order to qualify for this exception, the individual must be opposed to certain public insurance for religious or conscientious reasons but not for economic reasons. This can be done by filing IRS Form 4361.

Some religious workers or clergy are stated-employed. Allowance for state-employed clergy is a little different. Starting January 1, 2003, up to 50% of gross salary may be allocated for either the rental value of a home or the rental value allowance provided to rent a home. If the amount of the federal exclusion for members of the clergy is less than the California allowable amount, enter the difference on Schedule CA, line 7, column B. Likewise if the amount of the federal exclusion is greater than that of California enter the difference on Schedule CA line 7, column C. California has limits set for exclusion of the rental value of state-employed clergy and it looks like they are less of a benefit than what federal tax law allows.

Most taxpayers are on the cash basis of accounting and don’t even know it. Some including many corporations are on the accrual basis of accounting. If you own U.S. savings bonds, you must pay federal tax on the interest received from these bonds. When you report the interest, depends on which type of taxpayer you are. Normally, there are two kinds of taxpayers. One is the accrual method taxpayer and the other is the cash method taxpayer. Most taxpayers are cash method taxpayers. Many large businesses and corporations are accrual method taxpayers. If you are an accrual method taxpayer, you report interest on the bond when the interest is earned. If you are a cash method taxpayer, you report interest on these bonds when the interest is available to you or when you receive it. Most interest income received regardless of when you need to pay tax on the interest is taxable for federal tax purposes. However, for California tax purposes any interest received from United States bonds (or obligations) are nontaxable. It is important to note though, that California does not consider Federal National Mortgage Association (Fannie Mae), Government National Mortgage Association (Ginnie Mae), or Federal Home Loan Mortgage Corporation (Freddie Mac) to be federal obligations. Therefore, interest you receive from these investments are taxable to California. The interest on United States bonds that is included in your federal income must be adjusted for California tax purposes on Schedule CA of Form 540 or Form 540NR, line 8, column B. Making this adjustment on Schedule CA will exclude the interest from being included in the total California taxable gross income amount. When it comes to investments and United States savings bonds, your basis of accounting could make a different on the timing of your tax obligation.  

Non-California bonds from other states are taxable for California tax purposes. If you received interest from your investments in bonds from state or localities, you will not need to pay tax on these bonds for federal tax purposes because federal does not tax them. Usually this is true if the bonds were issued by one of the fifty states, Washington D.C., any of the possessions of the United States. Also some of the bonds issued by Indian tribal governments are treated as if they were issued by a state and thus are not taxable. However, the Indian tribal bonds that are not taxable for federal tax purposes are only those bonds which are issued after 1982.

California allows an interest net interest deduction on business loans and mortgage loans. You must meet certain criteria in order to qualify for the net interest deduction on business loans within a designated enterprise zone. First, the funds must be loaned within the time period allowed for designation of the enterprise zone. This is the time that includes the date of designation and after this date, and the period before the designation expires. The business must be located within the designated enterprise zone. Furthermore, the loan proceeds must be used only for the purpose of the business within the enterprise zone. Finally, the business owners must not also be the lenders. If the loan takes longer to pay that the designated time of doing business within stipulated time and once the designation period expires, you can no longer deduct interest for the loans. If you have this kind of interest deduction for your California tax return, you must make an adjustment since federal does not have such deduction to use on your federal tax return. You must fill out Form FTB 3805Z to claim this incentive on your California tax return. You must first fill out Form 3805Z and then transfer the amounts to your Schedule CA of Form 540 or 540NR along with “FTB 3805Z” net to the dotted line on Form 540 or 540NR, line 14 to indicate you are claiming the a net interest deduction for a business operated within an enterprise zone. It may be worthwhile to look into making business loans to businesses located in certain enterprise zones.

Investing in a regulated investment company can be a very beneficial investment and tax savings move for many taxpayers. Capital gain distributions are always reported as long-term capital gains on your federal tax return. You must also report any undistributed capital gain that a Regulated Investment Company has designated to you. The Internal Revenue code will tax your undistributed capital gain from a Regulated Investment Company the year when you have earned the income. However, California will tax the distribution from a RIC in the year distributed not the year it was earned. If the year in which it was distributed turns out to also be the year it was earned, then there will not be any need for any adjustment on Schedule CA of Form 540. If on the other hand, the capital gain from a Regulated Investment Company is earned in one year and distributed in a later year, enter the amount which was included in your federal tax return for year earned to adjust it from California on Schedule CA, line 9, Column B. Enter the amount not yet reported on your federal tax return for the year it was distributed on Schedule CA of Form 540 or Form 540NR, line 9, column C. This will reconcile the income to meet the California requirement of reporting the RIC in the year distributed rather than in the year it was earned. Remember, you will only do this if the year distributed and the year earned are different years. If they are not different, there is no need for an adjustment on California Schedule CA.

Federal tax withholding is not deductible on your federal tax return because it is money placed in advance of the anticipated money due on your taxes. California tax withholding is state withholding and the federal tax system considers it a tax expense and allows a deduction on Schedule A of Form 1040. The Internal Revenue Service taxes any California tax refund from which you have gained a tax benefit. If there was no tax benefit from the state refund, then it is usually nontaxable on your federal tax return. If you filed form 1040A in the previous year or you did not itemize your deductions in the previous year, you usually do not need to worry about including your state refund in your federal tax return. If the client itemized last year and you are trying to include the state refund in the taxable wages for federal, complete the worksheet and double check before you do include it. You can fill out the worksheet to make sure on the amount if any which would be taxable. You only need to worry about including your California refund on your federal tax return when you itemize in the previous year. The only manner in which you can benefit from a deduction on any state or local taxes paid is by itemizing your deductible expenses and the state and local taxes paid is one of the deductions you can take. If you paid any state or local taxes in the previous year, you usually calculate the state and local taxes paid and get a tax deduction for these on Schedule A of Form 1040. You only need to worry about the determination of whether your California state refund is taxable or not taxable for your federal income tax return. If you did include any California state income tax refund in your federal tax return because it was taxable to federal, then you need to exclude it from your California state tax return. Regardless, if this calculation was correct on your federal tax return or not correct, if you calculated an amount of the California state refund received as taxable for federal, you need to reverse that amount for California tax purposes. California state refund is not taxable income on you California tax return. Enter this amount on Schedule CA of Form 540 or Form 540NR, line 10, column B to reverse it from the federal adjusted gross income amount. If California taxed your state refund, it would be considered double taxation and double taxation is usually not allowed (well, sometimes it is). When double taxation happens, there is usually a credit to compensate for the extra expense (or the double expense).

However, California does not conform to the alimony repeal of the deduction of alimony. However, with your California return, you will continue business as usual and use the federal rules relating to the deduction for alimony and separate maintenance payments under IRC section 215. Likewise, California will continue as usual as to the inclusion of alimony in income (when federal does not) because California is not conforming to the new federal repeal to exclude alimony from income so for California, you must continue to include the alimony income on your California tax return.

Any business, trade, or profession which is conducted partially in California will go through an apportionment formula. For the most part California is in conformity with federal as to what income received is taxable income. Mainly, all income received for all sources is taxable income for both Federal and California and they coincide with this rule. However, there are few differences that are due to income earned outside of California or income earned by California partial year residents. It could be an adjustment due to a military pay adjustment issue. Compensation for military service members who are domiciled outside of California is exempt from California tax, for example. If a nonresident owns a business carried on within California such income has a source in California and it is taxable for California. Thus, gross income for this business would be included in the nonresident’s adjusted gross income from all sources for federal purposes. The amount that applies to California will have to be figured out by using an apportionment formula dependent on the percentage of income that was derived from California sources. The nonresident is not normally liable for income earned outside of California but he or she does need to pay tax on income earned from California sources as a nonresident of California. This is different from residents of California who are liable for tax on all income regardless of source. Some states offer a credit for taxes paid to others states in an effort to avoid double taxation of the same income. Most state, including California, offer a credit for taxes paid to other states. This is similar to the credit available by federal for taxes paid to other countries. Credits for taxes paid to other states in the case of California, and credit offered by federal for taxes paid to other countries, is to alleviate any double taxation involved. 

The idea behind the accelerated depreciation concept is that the equipment use will be more useful in the first years of service. After that, the machine will still be useful, but there will probably be more modern replacements for the equipment. Most companies replace their equipment often to the latest technology after only a few years or even a few months of owning the equipment. This makes perfect business sense. This makes so much perfect sense that the IRC code allows for a section 179 deduction. The section 179 deduction allows you to deduct most if not all of the of the assets in the first year of placing the asset in service. Of course, the deduction is subject to certain requirements and limitations.

New federal law provisions increase the maximum amount a taxpayer may expense under IRC section 179 to $1,000,000, and there is an increase phaseout threshold amount to $2,500,000. The provision provides that the maximum amount a taxpayer may expense, for taxable years beginning after 2017, is $1,000,000 of the cost of qualifying property placed in service for the taxable year. This is for federal tax purposes though. The federal provision expands to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. The new tax law also expands to include qualified real property eligible for IRC section 179 expensing to include any improvements to nonresidential real property placed in service after the date such property was first placed in service. This includes roofs, heating, ventilation, and air-conditioning property, fire protection, alarm and security systems. This is all to take effect after tax years after 2017.

California, although similar to federal amounts, has different amounts and limitations in mind. California differs on the amounts that you can deduct. California only allows a section 179 expense election of $25,000 and only up to $200,000 instead of the federal $500,000. Another thing, California does not conform to the section 179 expense allowed by federal for off-the-shelf software and certain qualified real property. If you take section 179 deductions on your federal tax return, make sure you make the necessary California adjustments by filling out Form FTB 3885A and then transfer those figures over to Schedule CA of Form 540 or Form 540NR. If you need to take a section 179 deduction, you can usually choose how much to deduct in the first year the property was placed in service.

California does not conform to the new federal law section 179 changes such as to the maximum  federal allowed expensing and the phaseout amounts, or the expanded qualified properties mentioned and therefore the federal modification to these amounts are not applicable to California. California allows "additional first-year depreciation" of up to $10,000 per year. Rather, California allows taxpayers to elect the IRC section 179 expensing deduction instead of "additional first year depreciation." Property that you can expense is similar to property you can expense under the federal IRC, but a corporation is only allowed one or the other of the deductions, not both.

For California you may elect to deduct up to $25,000 of the cost of qualifying property placed in service in the tax year. The $25,000 amount is reduced by the amount by which the cost of the qualifying property placed in service during the year exceeds $200,000.

We are looking at a big jump here from what the IRC allows and what California allows and you must be prepared to make adjustments to the California tax return for the amounts for which California does not conform to. 

However, on December 22, 2017, the new tax bill went into effect increasing the deduction for bonus depreciation to 100 percent. This new tax bill will take effect immediately allow businesses to deduct 100% of eligible property placed in service after September 27, 2017, and before January 1, 2023. Some eligible property with longer production periods, the 100 percent bonus depreciation is extended through December 31, 2023. Qualifying property is property that has a depreciable recovery period of 20 years or less. Now, eligible property is expanded to include used property, certain qualified film, television, and live theatrical production equipment. The new tax law excludes property from certain utility property and vehicle dealer property.

It is noteworthy that the rate of bonus depreciation will not always be 100% and it will decrease over the next four years:

80% for property placed in service in 2023

60% for property placed in service in 2024

40% for property placed in service in 2025

20% for property placed in service in 2026

0% for property placed in service after 2026

Bonus depreciation is retroactive beginning with assets purchased after September 27, 2017.

Property qualifying for the additional first-year depreciation deduction must meet certain requirements. First, the property must be (1) property to which MACRS applies with an applicable recovery period of 20 years or less; (2) water utility property, (3) computer software other than computer software covered by IRC section 197; or (4) qualified improvement property. Second, the original use of the property must commence with the taxpayer. Third, the taxpayer must acquire the property within the applicable time period. Finally, the property must be placed in service before January 1, 2020. If the property is certain transportation property and certain aircraft, an extension of the place-in-service date of one year is provided (i.e. before January 1, 2021).

The new tax law provision extends and modifies the additional first-year depreciation deduction through 2026 (or through 2027 for longer production period property and certain aircraft). If is important to find out about the IRC bonus depreciation for California because California does not conform to the IRCs bonus depreciation provisions. If the taxpayer has this bonus depreciation, you must be prepared to make an adjustment on your California tax return. California specifically does not conform to bonus depreciation and thus the federal provision that modifies and extends bonus depreciation is not applicable under the California personal income tax laws.

California also does not conform to the IRC section 168 provision relating to MCRS depreciation.

California allows "additional first-year depreciation" of only up to $10,000 per year. It does, however, allow taxpayers to elect the IRC section 179 expensing deduction in lieu of "additional first-year depreciation." Property allowed for "additional first-year depreciation" is similar to property qualifying under the federal IRC section 179.

1. $10,000 for the first year a vehicle is placed in service

2. $16,000 for the second year,

3. $9,600 for the third year,

4. $5,760 for each succeeding year until the basis in the vehicle has been recovered.

The amount in 1 through 4 above will change slightly to adjust for inflation.  So just to recap. The new TCJA provision increases the depreciation limitations under IRC section 280F that apply to listed property. For passenger automobiles placed in service after December 31, 2017, and for which the additional first-year depreciation deduction under IRC section 168(k) is not claimed, the maximum amount of allowable depreciation is $10,000 for the year in which the vehicle is place in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth year and later years in the recovery period.

California does not conform to the TCJA provisions for federal modifications to depreciation limitations on luxury automobiles and personal use property. Look at the rules closely, because California does conform to the federal rules for listed property under IRC section 280F as of the specified date of January 1, 2015 but not to the new federal modification to depreciation limits on luxury automobiles and personal use property.

MACRS stands for Modified Accelerated Cost Recovery System. Most property is subject to MACRS depreciation deduction and must be depreciated according to the schedule set by the Internal Revenue Service. MACRS is the accelerated depreciation system used for assets placed in service after 1986. It stands for Modified Accelerated Cost Recovery System. This depreciation system is composed of two other depreciation systems and they are the General Depreciation Systems (GDS) and the Alternative Depreciation System (ADS). You have a choice if you want to use these systems instead of the MACRS system. There are limitations on which properties can be depreciated using the MACRS depreciation system so pay close attention when you are depreciating your property to make sure you are indeed using the correct depreciation system.

There have been many differences in the manner of depreciation between California and the federal tax system over the years. It seems as if there was a lack of communication between the Internal Revenue Service and the state of California before. Now they are more in sync with each other and seem to be more conformity than before (before the internet era). As a result of the differences in the past, if you have assets that you are currently depreciating which were acquired before January 1, 1987, there are special adjustments that must be made for California. Federal allows a rapid write-off of tangible personal property and buildings over recovery periods which were shorter than economic useful lives under the Accelerated Cost Recovery System (ARS). California law generally did not conform to federal law but did allow ACRS for certain residential rental property constructed in California on or after July 1, 1985, and before January 1, 1987. Use form 3885A to figure the depreciation adjustment and the transfer amount to include on Schedule CA of Form 540 or Form 540NR).

California conforms to the federal rules relating to MACRS depreciation, under IRC 168, as of January 1, 2015. However, California specifically does not conform to bonus depreciation and thus any provision that modifies or extends bonus depreciation is not applicable under the California personal income tax laws. In addition, California does not conform, under the CTL, to IRC section 168, relating to MACRS depreciation. CTL is in substantial conformity to the pre-1981 ADR deductions and the ADR is based on the "useful life" of depreciable property. As to bonus depreciation, the CTL already allows "additional first-year depreciation" of up to $10,000 per year. However, California allows taxpayers to elect the IRC section 179 expensing deduction instead of "additional first-year depreciation."

You need to use Form FTB 3885A to figure the adjustment to make on Schedule CA of Form 540 or Form 540NR. California is not as generous in its depreciation allowance and therefore you must make an adjustment to account for the differences.

Okay, back to charitable contribution changes. This raise is the charitable contribution deduction can be used to be able to contribute more to your favorite charitable organization and make up for the loss of deductions elsewhere. However, even though this is a positive change in the tax law code, the other changes to the code will indirectly impact contributions to charitable organizations (Miller n.d.).  While this is great for your federal tax return, California does not conform to the increase. However, California does conform to the other rules under IRC section 170 as of January 1, 2015 (with some modifications).

Contemporaneous means that the donor receives the acknowledgment by the earlier of

• the date on which the donor actually files his or her individual tax return for the tax year that applies to the contribution, or
• the due date of the tax return, including extensions.

The taxpayer can provide another form of substantiation such a thank you letter from the organization as long as this other form of substantiation provides the same information of the donee organization.

Alternatively, the taxpayer could provide the Internal Revenue Code permitted the charitable organization to file a document with the IRS containing detailed information about the donor and hir or her donation.

However, with the new Tax Cuts and Job Act, this alternative process has been eliminated. Consequently, this does not seem to be a problem since most charitable organizations usually send thank you letters to their donors. It only makes sense that they do because they want the contributions to keep coming. The donor taxpayer can use this letter as substantiation that they have made the donation. That's it with the changes to charitable contributions in the new Tax Cuts and Job Act - the alternative gift substantiation for gifts of $250 or more has been eliminated.

The threshold percentage of unreimbursed medical expenses is the same for both federal and state purposes for the 2017 and 2018 tax years for purposes of the personal income tax. After taxable years beginning on or after January 1, 2019, the threshold for deducting unreimbursed medical expense for federal and state taxes will differ - 10 percent for federal AGI for federal taxes and 7.5 percent of federal AGI for state income taxes.

California does not conform to the federal change to the AMT medical expense threshold from 10 percent to 7.5 percent of AGI. For California AMT purposes, the unreimbursed medical expense threshold remains 10 percent of federal AGI.

The medical expense deduction is one of the few deductions that will be left to itemize on Schedule A. After the 2017 and 2018 tax years in which the 7.5 percent medical deduction threshold will be in place, then the threshold will revert to the 10 percent which means a lower medical deduction.

The type of eligible expenses remain unchanged for both federal and California. They continue to include

• Expenses for doctor, dentists, chiropractors, psychiatrists, psychologist, podiatrists, and other medical professionals.
• Health insurance premiums
• Premiums for long-term care insurance
• Inpatient alcohol and drug treatment programs
• Wheelchair ramps and other modifications to your home for medical reasons
• Transportation to doctor appoints and visits such as taxi, bus fares and other items such as parking
• Prescription drugs
• Payments for smoking-cessation programs and weight-loss programs that are related to a specific disease diagnosed by a doctor

The items you cannot deduct for both federal and California continue to be the same such as over-the-counter medicines, toothpaste, cosmetic surgery, gym memberships, nutritional supplements, nicotine patches or gum and teeth whitening.

When you move your business to California, you must adjust to the beautiful capricious weather and make certain other adjustments to your business such as your depreciation methods. However, if the method of depreciation used in the other state is a California acceptable method, there is nothing to worry about. You can just continue using it as if you never moved. Your depreciation may be different if you lived in a state other than California. All depreciation methods used must be acceptable to California. If you moved your business property to California, you must adjust your depreciation and the useful life of the property to acceptable California methods. If you were using an unacceptable depreciation method before your move into California, use the straight-line method to compute the basis in the property.

California conforms to the deductibility of taxes under IRC section 164. However, California does not allow a deduction for state and local, foreign, income, war profits, and excess profits taxes or the election to deduct sales taxes so when you file your California return you need to reverse these. The deduction of taxes has always been a deduction you take on your federal return and for which you have to always make an adjustment on your California tax return on Schedule CA. California does not conform to the $10,000 Federal SALT limitation.

Some taxpayers may be confused because maybe they think that this is only the state and local taxes withheld on their Form W-2. No, it is more than that. It is that plus the real estate property tax, property taxes such a the tax from the DMV taxes you pay for owning your car or cars, All these make up a huge chunk and the $10,000 cap may be way less than the actual amount spent. For some taxpayers, this deduction can mean it is $1,500 less but for other it could mean it is $18,000 or even $25,000 less.

There are two items you must consider in your ability to deduct home mortgage interest on your tax return. First, you will only be able to deduct the interest on the first $750,000 of your home mortgage debt. This may not matter in Bakersfield, California, for example, because homes there are way below this amount. However, in San Francisco, the median home price is $1.5 million. Second, the interest on home equity loans will no longer be deductible. Well, this only affects the loans taken out and used for purposes other than to improve the current home. Therefore, no more taking out a home equity loan to pay off your credit card and auto debt, it will no longer be deductible. The new tax law provision suspends the deduction of interest on home equity indebtedness and for tax years beginning after December 31, 2017, a taxpayer may not claim a deduction for interest on home equity indebtedness or on home equity loans (seconds on your home).

Another important thing about home mortgage interest is that this applies for loans acquired after December 15, 2017, you remain unaffected by the new tax reform. You will be able to deduct your interest as you have been doing, all of it. With home equity loans, though, this is a different story as the new tax law affects even loans that were acquired before December 15. 2017. You will not be able to deduct home equity loan interest regardless of when you acquired the home equity loan.

California agrees and has been conforming to the deduction of home mortgage interest for homeowners. California has been allowing a deduction for qualified principal residence interest under the IRC section 163. California does not conform to the new federal limitation on the deduction of qualified residence interest. Therefore, if you deduct home mortgage interest on Schedule A, you will be able to take a deduction on both federal and your California tax returns. And guess what? If you get a second on your home, even if you acquired it before December 31, 2017, federal will not allow a deduction for your interest paid on that second loan but California will. So get ready to make an adjustment for this on your California Schedule CA.

If your credit card company cancels all or part of your debt to amicably settle what you owe them, there may be some tax implications. The money forgone by the credit card company is most likely taxable income. You must include the canceled amount of the debt in gross income unless you qualify to exclude it. Some people may not be aware that they have a taxable transaction when they have a forgiven debt.

Student loans can help can be a huge help when attending school. With the high cost of attending college, many times, being able to receive these student loans will determine if you will pursue your higher education or not. If you have student loans, keep track of your interest paid on those student loans so you can deduct the interest on your federal tax return. You may be able to deduct up to $2,500 of the interest you actually paid for the year. You have a gross income limitation which means that your interest deduction may be reduced if your gross income goes over a certain amount. Other than that, the other qualifications in order to claim the deduction are not too harsh. As long as you don’t file married filing separately or be able to be claimed on someone else’s tax return, you should be fine to claim the deduction. California mainly conforms to the federal tax law, except for issues involving residency status such as when the taxpayer is a not a California domiciled military taxpayer, or a spouse of a non-California domiciled military taxpayer who resides in a community property state. If your student loan deduction for federal tax purposes involves any of these, enter the corresponding amounts on your California Schedule CA, line 33, column C to exclude the deduction from your California tax return.

Talking about students and the tax benefits of being a student, federal tax law also allows another deduction for tuition and fees paid. In addition to claiming the tuition and fees deduction, you can use your fees expenses to claim the American opportunity tax credit or lifetime learning credit. If you have a business, you can also use these fees to claim a business expense and these expenses would otherwise qualify as a business expense for your business. As with the student loan interest deduction, you cannot be able to be claimed as a dependent by someone else or use the married filing separately filing status to claim the tuition and fees deduction. Anyways, this is all true for federal tax purposes and the maximum amount you can claim is $4,000 for qualified education expenses. However, this is not true for California. California does not have such a deduction. Therefore, if you have such a deduction on your federal tax return, you must reverse it for California tax purposes by entering the federal deducted amount on your California Schedule CA, line 34, column B.

If you have current student loans or are paying back student loan debt you must know the tax consequences of not paying your student loans. Student loans are debts that not even forgiven in bankruptcy. However, there are still some deductions you can take. The student loan deduction remains the same and you are still allowed to claim a deduction of up to $2,500 for the interest you pay on student loans every year. Additionally, tuition waivers for graduate students remain tax-free. This means you could waive your tuition even if it is $50,000 per year. 

You can discharge your federal and private student loan debt and you will not have to pay any tax from 2018 through 2025. The student loan discharge will no longer be treated as taxable income by the Internal Revenue Service. After 2025, it is to be seen what will happen. But for now the new tax bill excludes student loan debt forgiveness from taxable income if you are permanently disabled. It also excludes student loan forgiveness in case of death. You may be thinking that nothing will matter after you are dead, although for many people this is not true specially if they have children who depend on them, this is quite important if your student loan was cosigned by someone. The cosigner will not be held accountable for your student loan because it will be a tax-free transaction.

The new Tax Cuts and Jobs Act has remained generous with student tax matters and has not suspended any of the credits that pertain to education. For example, there is a favorable change to the rules as to how money can be used for the 529 savings accounts to include K-12 and not only the previous only for college rule. The credits remain intact such as the Lifelong Learning Credit. This new rule to make discharge of certain student loan indebtedness completely tax free from 2018 through 2025 is another one of these benefits display concern for the well-being of our students.

California does not conform to the exclusion from gross income for student loan discharges due to the death or disability of the debtor. However, California has a stand-alone student loan debt provision that is different from federal or for which federal does not offer a similar provision.

California allows an exclusion from gross income for student loan debt that is cancelled or repaid under the income based repayment programs by the U.S. Department of Education. This exclusion applies to discharges of student loan indebtedness occurring on or after January 1, 2014. In addition, for taxable years that begin on or after January 1, 2017, and before January 1, 2022, California allows an exclusion from gross income from student loan debt that is cancelled or repaid under the Income Contingent Repayment plan, the Pay As You Earn Repayment plan, and the Revised Pay As You Earn Repayment plan as administered by the U.S. Department of Education. For student debt discharges the occur on or after January 1, 2015, and before January 1, 2020, existing state law excludes from an eligible individual's gross income any amounts that would otherwise result from a student loan forgiven as a result of the closure of Corinthian Colleges and similar closures. If you have a student loan forgiveness that has not been cancelled and become taxable on your federal tax return, maybe it is not taxable for your California tax return and be ready to make the adjustments on Schedule CA.

In case you don't know, 529 plans are tax-advantage investment accounts which were originally designed to help families pay for a college education for their child. It is based on tax free interest compounding. Any 529 withdrawals are tax-free so long as you use the funds toward qualified higher education expenses. These expenses include tuition, room and board, and even computer software and hardware.

Now the new tax law, allows parents to use these same benefits to pay for their child's education which means that the parent would be able to send their children to private grade schools and high schools. The 529 savings plans have not income limits, no contribution limits, no contribution deadlines, and no account time limits.

Here is the deal. The new tax bill will allow you to use 529 plans for up to $10,000 per year in K-12 grade tuition expenses. This is important for families who send their kids to private schools or to religious schools. Moreover, if the family is already saving in similar plans such as the Coverdell ESA, they can switch to a 529 plan and rollover the amounts with absolutely no tax consequences whatsoever. Again, California does not agree with this higher distribution amount.

There is one first question that comes to mind. How is this 529 savings plan, which usually has to do with saving money by making any interest received tax-free income when your infant or young child is of college age, going to help for a child's immediate education? These are normally long term investments - say 5 or 10 or even 18 years for when you child is ready to go to college. There does not seem to be too much benefit there, it there? One benefit to think about in the short term is the fact that your state may have a deduction or credit for contributions made to a 529 plan. The deduction would depend on your state with deductions limits ranging from $500 per year to the entire amount of the 529 plan contribution. Your state may even carry forward any excess contributions for later years. Some of the states that offer such credits or deductions include Arizona, Kansas, Minnesota, Missouri, Montana and Pennsylvania.

As with the section 529 plan, this too can be used for the qualified education of a child which includes qualified elementary, secondary and qualified higher education expenses. Under federal tax law, a student may receive a maximum of $10,000 during a taxable year for the distributions to be free of tax. California conforms to these provisions as of January 1, 2015 as to the framework and plan, but does not conform to the new federal changes that include funding also for elementary and secondary education. California wants to keep the original spirit of this tax benefit at the college level. Rightfully so - Keeping this plan at the college will prevent abuse by the people who want to send their students to private grade schools. California also does not agree with the new federal rules as to the maximum distribution amount of $10,000.

The annual contribution is adjusted for inflation as are most other items in the tax code. For the 2018 tax year an adjustment to ABLE for inflation is set at $15,000. Previously the annual contribution for ABLE was $14,000 for 2017.

The annual contribution limit for the ABLE is $15,000 in 2018. ABLE account owners can choose to contribute to their own accounts, have friends contribute or have family contribute to the account. The ABLE account owners who decide to contribute to their own account are now able to take advantage of the Retirement Savings Contributions Tax Credit which is also known as the Saver's Credit. However, you have to qualify for the Saver's Credit. The Saver's Credit is a non-refundable credit.

If you are the both the owner and the beneficiary on both accounts, you are now able to transfer funds in a 529 college savings account to an ABLE account without incurring any tax or penalty. However, the funds rolled over from the 529 college savings account to an ABLE account are still subject to the annual contribution limit of $15,000 for the tax year.

That is, unless the ABLE account owner is employed. If so, under the ABLE to Work Act, the ABLE account owner may be eligible to contribute above the $15,000 annual contribution limit and depending on the gross income this amount could be an additional $12,060. These contributions which are above the $15,000 annual contribution limit would be limited to contributions made specifically by the account owner into their ABLE account. In addition, federal provisions allows a designated beneficiary of an ABLE account to claim the saver's credit for contributions made to his or her ABLE account. However, California does not conform to this saver's credit and California has not comparable credit.

California is all for the ABLE contribution program but does not conform to the new federal increased contribution limitation to ABLE accounts under certain circumstances.

In addition, California does not conform to the rollover of 529 accounts to an ABLE account without a penalty. If you encounter this situation, be prepared to fill out the required California State Form FTB 3805P to figure the 2.5 percent early withdrawal penalty.

In order to motivate companies to make treatment drugs that would otherwise would not yield a profit, the Orphan Drug credit has been created. The Orphan Drug credit is geared more towards pharmaceutical companies than to individual taxpayers. The drugs created are the type of drug that would cure rare conditions. Taxpayers can claim the Orphan Drug Credit which gives them a 25% credit for having qualified clinical testing expenses for testing drugs to cure rare diseases or conditions. Previously you could deduct 50% and now the new TCJA reform of 2017 has reduced it. For federal tax purposes, you cannot use the same expenses you use for the credit as a deduction in other parts of your tax return. Doing so would trigger a double credit for the same items. Since California does not have an Orphan Drug Credit, any expenses that were used for the credit must be reversed in order to benefit from these expenses on your California tax return. To do this, you must enter the amounts that reduced the federal deduction for qualified clinical testing expenses on Schedule CA of Form 540 or Form 540NR. Although California does not have such a credit, it is important to consider this credit in your California tax calculations since some of the expenses that are deductible toward your federal taxes are used in a different manner for California tax purposes. The credit was 50% and now it is only 25% and California does not have a comparable credit. 

Clubs which discriminate should not be allowed to be open. However, every club has the right to do business as they which under federal tax law. Unfortunately, discrimination is a freedom exercised by many. There is not much any of us can do about clubs that discriminate. According to the law, clubs can discriminate as long as they are truly private. What constitutes a public club and a private clubs is where it gets a bit more complex. The Supreme Court forced the Boys Clubs to admit girls and now the Boys Clubs is known as the Boys and Girls Clubs. The rule change was because the boys accepts all boys into the clubs, therefore it was really public. For federal tax purposes, any reasonable expense incurred necessary to perform your business, it a deductible expense for your federal tax return. It is not taken into account whether the club discriminates or not, but rather if the club is conducive for business communication or negotiation talks between partners or between the business and the clients. There are limitations in place to ensure that the deduction will not be abused. For example, expenses of taking your wife along will be allowed as business deductions for tax purposes if the client takes his wife along and the presence of your wife at the meeting would be an acceptable norm. To elaborate further, if you invite the client to dinner, it would probably be impractical not to invite his or her spouse. Therefore, you would have to take your spouse along and can deduct the cost for the client’s spouse’s dinner and your spouse’s dinner as well. Smart. You can have the IRS pay the bill. That’s what many people think, isn’t it? Not quite true. The IRS and California help you with part of the bill through a tax deduction on your tax return. You can go out to dinner all the time and make it tax deductible for both federal and California tax purposes if your meal expense meets the requirements.

The federal government has set certain provisions to designate certain communities as renewal communities. Once the area is designated as a renewal community, the community is eligible for certain tax incentives which include a commercial revitalization deduction under section 14001. As a renewal community which has met certain criteria, federal law allows a deduction of 50% of any qualified revitalization expenses to any qualified revitalization building in the year in which the building is placed in service or a deduction of those expenditures ratably over 120 months that begins with the months that the building is placed in service. Not for California though. If you have such a deduction which is allowed on your federal tax return, you must make an adjustment on your California tax return on Schedule CA of Form 540 or Form 540NR. California should have such a credit, but it does not. There are many buildings and communities in California in great need of rehabilitation.

If you qualify as a small business employer, you have an incentive under federal tax law to offer your employees health insurance coverage. For federal tax purposes, a small employer can be eligible for a small business health care tax credit. In order to be eligible, the employer must have fewer than 25 full-time equivalent employees, average annual wages of its employees that are less than $50,000, paid a uniform percentage for all employees that is equal to at least 50% of the premium cost of employee-only insurance coverage. By equivalent employee it means that any employees who are not fulltime count as a fraction of an employee. For example, a half time employee counts as 50% of an employee. Most organizations can be eligible employers, even exempt organizations. The employer must reduce any insurance deductions for the amount of the credit. However, for California purposes you don’t need to reduce your insurance deductions and the entire amount of insurance is deductible. To make the adjustment on your California tax return, enter any insurance deductions not permitted on federal on you California tax return by filling out Schedule CA of Form 540 and Form 540NR. California adds an additional incentive for small business employers to offer health insurance to their employees by placing less restrictions on health insurance deductibility.

An IRA may be a great way to save for your retirement. There are many tax savings and benefits in place for investing in an individual retirement account. The cost basis of your traditional IRA is the sum of any nondeductible contributions to your IRA minus any withdrawals or distributions of nondeductible contributions. Cost basis in your traditional IRA is dependent on whether or not you made any nondeductible contributions to the traditional IRA. You may have differences between federal and California depending on when contributions were made to your IRA. You may also have differences between federal and California amounts if you changed residency. Your amounts could also be different due to differences in California and federal self-employment income. You may need to calculate your IRA basic for California differently than what you have calculated for federal.

There are benefits offered by investing in a Roth IRA which you may not get when you invest in a traditional individual retirement account. You can make contributions to a Roth IRA regardless of your age. You may also be able to claim a credit for federal for contributions you make to your Roth IRA. If you contribute too much to a Roth IRA, you may be liable for a federal 6% excise tax penalty. Not for California, though, because California does not have an excise tax.

An individual may make deductible contributions to a traditional IRA up to the IRA contribution limit (reduced by any contributions to Roth IRAs) if neither the individual nor the individual's spouse is an active participant in an employer sponsored retirement plan. With Roth IRAs, individuals with AGI below a certain level may make nondeductible contributions to a Roth IRA. The maximum annual contribution to a Roth IRA is phased out for taxpayers with AGI for the taxable year over certain income levels. Except in the case of conversion or recharacterization, amounts cannot be transferred or rolled over between the two types of IRAs. You can convert from an IRA to Roth IRA by doing a trustee-to-trustee transfer of the amount from the traditional IRA to the Roth IRA, or you can make a contribution from the traditional IRA to the Roth IRA within 60 days.

If the individual makes a contribution to an IRA (traditional or Roth) for a taxable year, the individual is permitted to recharacterize the contribution as a contribution to the other typ of IRA (traditional to Roth) by making a trustee-to-trustee transfer to the other type of IRA before the due date for the individual's income tax return for that year. In case of a recharacterization, the contribution will be treated as having been made to the transferee IRA (and not the original, transferor IRA) as of the date of the original contribution. Under the new federal tax law effective after December 31, 2017, recharacterization cannot be used to undo a Roth conversion. Recharacterization is still permitted with other contributions. An individual may make a contribution for a year to a Roth IRA and, before the due date of the tax return, may recharacterize it as a contribution to a traditional IRA.

California conforms to all federal deferred compensation, relating to pension, profit sharing, stock bonus plan etc. The federal repeal of the special rule permitting recharacterization of Roth conversions automatically applies under California law without regard to taxable year to the same extent as applicable for federal income tax purposes. Federal IRC sections automatically apply without regard to taxable year to the same extent as applicable for federal income tax purposes and thus adopt all changes made to those IRC sections without regard to the "specified date" contained in the R&TC sections 17024.5 and 23051.5.

California conforms to federal tax law on contributions, conversions, and distributions of Roth IRAs. The only thing that could be different is the taxable amount of a distribution due to basis differences. Compare the benefits of investing in a Roth IRA and the benefits of investing in a traditional individual retirement account and choose the one the gives you the greater tax benefit.

Usually filing a tax return is not required if your only income for the tax year is only from Social Security benefits or Railroad Retirement benefits. Not always though and you must know the maximum amounts in order to avoid any errors when reporting your social security or railroad retirement benefits. Your Social Security or railroad retirement benefits may be taxable if you have other income and your income goes over a certain amount or the base amount for your filing status. Social Security and railroad retirement benefits can only be taxable for federal though, not California. These also include Annuities or Pensions by the Railroad Retirement board or any payments by the Railroad Retirement Board. If after calculating your Social security or railroad retirement benefits and any amount is taxable for federal and thus included in federal income, you must make an adjustment to reverse it on your California tax return. Do this on California Schedule CA of Form 540 or Form 540NR. Social security and railroad retirement benefits are never included in your income for California tax purposes.

There are many employee fringe benefits affected by the Tax Cuts and Jobs Act (TCJA). First, the employees can no longer deduct unreimbursed business expenses. Second, moving expenses are no longer deductible like they used to be. Third, the employer can no longer deduct qualified transportation benefits for providing tax-free transportation fringe benefits by the employer. Neither can the employer deduct any expense incurred for providing any transportation between the employee's residence and place of employment. Fourth, entertainment expenses are out as the TCJA does not allow an employer to claim a tax deduction for entertainment. In addition, the TCJA will continue to allow the value of meals to be tax-free provided certain conditions are met. Finally, the TCJA limits the conditions of tangible personal property for employers who make a tax-free award of tangible personal property for length of service or safety achievement.

Unreimbursed business expenses are no longer allowed. If an employer reimburses an employee for a business expense, the reimbursement is tax-free to the employee, but if the employer does not reimburse the employee, the employee is no longer allowed to claim a tax deduction for this expense.

The rules for employer-operated eating facilities remain at only 50% deductible. Section 123(e)(2) provides the value of meals can be tax-free if

• The facility is located on or near the employer's business premises.
• The facility's annual revenue equals or exceeds its direct operating costs and
• For highly compensated employees, the facility is operated without discrimination in favor of such employees.

Section 119 provides the value of meals furnished to an employee can be tax-free if

• The meals are provided on the employer's business premises.
• The meals are provided "for the convenience of the employer".

However, the TCJA tax reform now imposes a 50% limit on deducting food or beverage expenses to employees at an employer-operated eating facility. Furthermore, these expenses will be fully nondeductible after December 31, 2025.

The tax code permits an employer to make a tax-free award of tangible personal property to an employee for length-of-service or safety achievement. The TCJA tax reform states that tangible property does not include

• Cash, cash equivalents, gift cards, gift coupons, or gift certificates; or
• Vacations, meals , lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.

As you can see, there are many employee fringe benefits affected by the Tax Cuts and Jobs Act (TCJA). Unreimbursed business expenses are no longer allowed. Moving expenses are only allowed for member of the military. With the new tax reform the employer can still provide tax-free qualified transportation fringe benefits to employees, except for qualified bicycle commuting reimbursements. The employer will not be allowed to deduct any commuting expense incurred for providing any transportation to travel between the employee's residence and place of employment unless it is for the employee's safety. The TCJA tax reform will also no longer allow a deduction to employers for entertainment and recreational expenses or deductions with respect to any facility used in connection with such activity. The rules for employer-operated eating facilities remain at only 50% deductible. The new TCJA tax reform puts limitation son what tangible property includes or does not include. Very much effort has been placed on the deduction allowance or disallowance of employee fringe benefits.

California conforms to the rules of deducting fringe benefits under IRC section 274 as of January 1, 2015, but does not conform to the repeal of the present-law exception relating to the deduction disallowance of entertainment, amusement, or recreation that is directly related to the active conduct of trade or business. Be ready to make adjustments on Schedule CA if you want to be able to deduct your entertainment expenses for your California tax return. There is zero deduction for these expenses on Schedule A but deductions will be allowed in your Schedule CA.

There are some U.S. taxpayers who hold interest in two popular Canadian retirement plans to get favorable U.S. tax treatment and therefore save money on their federal tax return. In 2014, the Internal Revenue Service eliminated the special annual reporting requirements that taxpayers with Canadian retirement plans. The two most popular Canadian retirement plans are the Canadian Registered Retirement Savings Plan (RRSP0 and the Registered Retirement Income Fund (RRIF). With the new tax change, many Americans and Canadians with these retirement plans can now automatically qualify for tax deferral in a similar manner that is available to participants in U.S. individual retirement accounts (IRAs) and 401(k) plans. American citizens and resident aliens can continue to enjoy the special tax treatments as long as they continue to be tax compliant and continue to include any distributions as income on their U.S. tax returns. This is not to say that the tax treatment is the same as those with IRAs, just similar. Federal tax law allows taxpayers to defer taxation on their RRSP earnings until the time of distribution. These provisions do not apply for California tax purposes. Therefore, California residents with RRSP earnings must include these earnings in their taxable income in the year earned. Include these earnings from RRSP distributions on Schedule CA of Form 540 or Form 540NR.

You must be able to identity what constitutes unemployment compensation and what does not. Usually it is very simple. You go to the unemployment office and you seek compensation because you are out of work. If you are out of work and cannot work because you were injured or are handicapped, then that is another story. Your benefits received from the unemployment office in this case could be completely tax free for federal and California tax purposes. Unemployment compensation includes amounts received by the United States or California. Unemployment compensation does not included amounts such as worker’s compensation payments, supplemental unemployment benefits and unemployment benefits from a private club to which you voluntarily contribute. You must include your unemployment compensation in your gross income. Some folks receive hefty amounts in unemployment compensation and it would be best for them to have federal withholding taken out of the amounts received. You should opt for withholding so that you don’t end up short when you file their federal tax return. Withholding is voluntary and at one point in the employment process someone will ask you if you would like to have money withheld from your unemployment compensation checks. As far as California is concerned, unemployment is not taxable so you don’t have to worry about asking for California tax withholding from your unemployment compensation. Unemployment compensation is not taxable on your California tax return. For California, you need to adjust your federal gross income which includes the unemployment part. Whatever amount of unemployment compensation you have included in your federal tax return comes right out by entering it as an adjustment on California Schedule CA. The unemployment compensation is not taxable to California therefore it should not be included in your California gross income.

If you have a family emergency, you should be able to leave work without suffering any repercussions. The Paid Family Leave (PFL) program allows employees to leave work for a specified amount of time for family emergencies. An employee can ask for time off to tend to the birth of his or her child and to take care of a newborn. Another occasion which qualifies for the family leave is when a placement agency places a child with the employee and the employee needs time to get adjusted to the new situation and better care for the child. Furthermore, if the employee has a spouse, child or parent whom has serious health conditions, he or she can take time off to take care of them. If the employee is unable to work due to some illness he or she can request some time off under the family leave act to request time off to care for the illness. You basically can take a leave of absence under the family leave act for any emergency that arises involving your immediate family or yourself. Your immediate family is your spouse, your son or daughter, or your parents.

New federal law will offer an employer credit for paid family and medical leave beginning tax years beginning December 31, 2017. The eligible employer will be able to claim a general business credit equal to 12.5 percent of the amount of wages paid to qualifying employees during any period in which such employee are on family and medical leave if the rate of payment under the program is 50 percent of the wages normally paid to an employee.

Because of the regulations the govern the practices of the paid family leave (PFL) program, many working individuals can receive the proper time off in order to tend to their family needs in case of an emergency. California law considers the leave compensation nontaxable income for state purposes.

For federal tax purposes, gambling and lottery winnings are taxable on your tax return. Anything that is considered gambling is taxable for federal tax purposes. Gambling could be in the form of lotteries, horse races, raffles, casinos, California lottery winnings, and any prizes that you win. You can deduct gambling expenses up to the gambling winnings for federal tax purposes. For California tax purpose, essentially the rules are the same as federal and gambling winnings are taxable and the expenses of gambling are deductible up to the winnings. This is true, unless the winnings are from the California lottery. Winnings from the California lottery are not taxable for California and therefore any gambling expenses you have for these California lottery winnings are not deductible expenses. When you prepare your California tax return, make sure you include gambling winnings that are not from the California lottery. If you had California lottery tickets and you have included them in your federal tax return because they are taxable for federal, you must make an adjustment for California. Enter the amounts that are not taxable for California on Schedule CA to subtract the winnings from your California gross income. You also need to make sure that you have adjusted any gambling expenses claimed on your federal Schedule A that pertain to California lottery winnings. If you are not claiming the income, you cannot claim the expenses that pertain to that income.  

Just imagine how horrible it must be to incarcerated for any crime. Now, imagine how much more horrible it would be to be incarcerated for something you did not do. No compensation or tax deduction would ever be enough to repay the victim of wrongful incarceration. To top it off, once you do receive this compensation for this horrendous crime against you, you have to pay taxes on it. Imagine that. Well, unfortunately, this is true. You have to pay taxes on wrongful incarceration payments for federal tax purposes. This is simply disgraceful. In order to receive a completely tax free treatment for your compensation for incarceration, you must have “suffered physical injuries and physical sickness while incarcerated.” What!? No, this is just not right! The state of California does not think this is right either. You can exclude 100% of the wrongful incarceration compensation amount for California tax purposes. Someone is finally using their brain and thinking right. Enter whatever wrongful incarceration amount which is taxable for federal tax purposes on your California Schedule CA to make an adjustment because this amount is not taxable on your California tax return.      

Some people pay taxes and don’t even know it. Their employer deducts a certain amount from their check and these amounts are distributed to the different tax agencies such as California withholding, local tax SDI, federal and social security taxes. Other individuals or businesses which transact business overseas, will probably have paid some form of foreign tax to the foreign government. You can deduct payments you make for deductible taxes on your federal tax return. A deductible tax is one that you are responsible to pay and one that you actually paid. You can deduct state, local and foreign taxes, real estate taxes, taxes paid for personal property and general sales taxes that you paid for in the year. You can also deduct estimated taxes paid. If you have any amounts which for these types of taxes on your federal tax return, you need to make an adjustment on your California tax return. You must include these amounts on your California tax return to exclude them because California does not allow a deduction for any of these taxes, not even for taxes paid for State Disability Insurance (SDI). Just like you cannot your federal tax withholding on your federal tax return, you cannot deduct any state taxes paid on your California tax return. So it is not really that California does not conform to federal, it is just that these are usually taxes withheld at the California level. If you have any of these taxes on your federal tax return for which you qualified to take a deduction, enter them on your California Schedule CA to reverse the deduction from your California tax return.

There are so many other deductions. If you have any other adjustments for which you can take a federal deduction but not for California, you enter it on your California Schedule CA to either remove it from California or to add to California. Once you review Schedule CA, you will become familiar with where every possible deduction goes. Sometimes federal tax law allows a deduction for a natural disaster such as the recent Philippines Disaster Contribution for which California has no such deduction, you need to know where on your California tax return to make the adjustment. These types of other adjustments usually go on your California Schedule CA. Every time you have a certain deduction or credit for federal tax purposes, you should always find out if California conforms to the federal deduction or credit and if not, you must make adjustments accordingly. 

The California Earned income tax credit is a replica of the federal earned income credit but with modifications. Under federal IRC, an eligible individual is allowed an EITC equal to the credit percentage of earned income but only up to the earned income amount for the tax year. For federal purposes of the EITC, earned income includes wages, salaries, tips and other employee compensation.  However, this is only if those amounts are includable in gross income for the year. However, for California the definition of earned income is modified to include wages, salaries, tips and other employee compensation, but only if those amounts are subject to California withholding. Additionally, for California net earnings from self-employment is included in the definition of earned income for taxable years beginning on or after January 1, 2017.

California conforms to the federal EITC as to the federal law requirements for claiming the federal earned income credit with minor modifications. For example, for California, the definition of earned income is modified to include wages, salaries, tips and other employee compensation. This income is considered earned income only if these amounts are subject to California withholding. Also, beginning January 1, 2017, net earnings from self-employment is included in the definition of earned income. In addition, California does not conform to the provision to substitute the earned income from the preceding year for the earned income for taxable year that includes the applicable dates during which individuals were displaced from their principal residence in hurricane zones.

Even if the tax agencies were not asking you to exercise due diligence in helping taxpayers obtain tax benefits, you should anyways. If you know that a taxpayer does not really qualify for the head of household filing status, you should not help him or her claim this filing status. You should not be helping taxpayers cheat the system and you should not be bending the rules when it is not up to you to bend the rules for your clients. Your clients will not help you repair the damage when you are bending the rules, they break. When the IRS is charging $500 for each item for which you are not showing that you exercised due diligence, the clients whom you are helping break the rules will not be there to help you get out of trouble. Due yourself a favor and follow the rules and comply with the due diligence requirements to the dot both for federal and for state.

The Head of Household (HOH) filing status gives you the benefit of a lower tax and a higher standard deduction than that of a Single or Married Filing separate filing status. The head of household filing status is probably the filing status with which the state of California is most preoccupied. This is for good reason too. This is the most abused filing status of all the filing statuses. Many people are too liberal when it comes to applying the Head of household rules for either federal or California tax filings. To qualify for the head of household filing status benefit, you must have a child whom qualifies you to claim the head of household filing status. You must be unmarried or be considered unmarried on the last day of the year. You must have paid for more than half the cost of keeping up a home. Furthermore, you must have a child who lived with you for more than half of the year or a qualifying person such as your parent who does not need to live with you. People seek to receive the lowest possible tax rate available to them. If you qualify for the head of household filing status, you rate will be lower than that of a single or married filing separate taxpayer. Also, taxpayers who use the head of household filing status qualify for certain credits that they may not qualify for if they are single or if they file married filing separate. Married taxpayers want to file head of household instead of married to get credits offered by federal.

The person who qualifies you does not have to be a child. That person can be your parent whom does not have to live with you in order to qualify you. You do however have to provide more than half the upkeep of that person’s home. If you pay for more than half the cost of the upkeep of that person’s home, you have provided more than half the upkeep. In determining if you provided more than half the upkeep of the home, you only consider items for the home itself, such as utilities and repairs. Any expense for which you have paid for that persons clothing, education, medical, vacations, life insurance or transportation are deductible expenses. There expenses are geared toward calculating if you can claim an exemption for the person instead. For the home, you include only costs paid for rent, mortgage interest, real estate taxes, insurance, repairs, utilities and the food eaten in the home. You must support a home for the qualifying individual and must have paid more than half of that support for the individual.

There are many taxpayers who break the tax rules every year. They contend that no one knows that their spouse did indeed live with them. Some people go as far as getting separate addresses in order to try to hide the fact that they lived together. Sometimes with the help of a little know how from the tax preparer, the taxpayer goes around the rules and files as he or she wishes to file. If the taxpayer was married at the end of the year and the spouse was a nonresident alien at any time during the year, then this would be the only way that they can be considered unmarried for tax purposes or for head of household purposes. Other than this, they are pretty much set to be considered married and they would have to file a married filing jointly or married filing separately tax return for the year. Otherwise, it would be considered breaking the rules and this is the reason California has come up with tougher enforcement efforts on head of household tax returns. If two or more taxpayers including a parent claim the same child as a qualifying child for a particular tax year, the person shall be treated as the qualifying child of the taxpayer who is the parent. However, if none of the taxpayers is the parent, then the taxpayer with the highest adjusted gross income for taxable year shall be able to claim the head of household filing status. 

Generally, if two or more people keep up the same home, only one of the people could pay more than half the costs and qualify for the head of household filing status. When two or more families occupy the same dwelling, each family may be treated as keeping up a separate home if each family maintains separate finances and neither contributes to the support of the other family. The taxpayer who provides more than half the cost of maintaining a separate home is treated as keeping up that separate home. To determine whether you paid more than half the cost of keeping up your home do not include costs of clothing and vacations, costs for education and transportation, or costs for medical treatment and life insurance.

If someone lived with you for exactly six months does not mean that the person lived with you more than half the year for head of household purposes. The rule is the the individual must have lived with you for more than half of the year. If the child lived with you exactly six months and exactly six months with another person, you cannot choose who will be able to claim head of household for that child. The rule is that the child must have lived with you for more than six months and exactly six months is not considered more than six months. It is such a weird concept that just one day would make such a huge difference. 

You must meet the same head of household requirements that married individuals meet to be considered head of household for tax purposes or to be considered not in a registered domestic partnership. These requirements include not having lived with your partner at any time during the last six months of the year. You must have a qualifying child or qualifying relative who qualifies you to claim the head of household filing status. The child must have lived with you for more than six months of the year and you must be able to claim an exemption for the qualifying child. If you have a qualifying person instead, your qualifying can be a parent who does not have to live with you. In either case, you must have supported a home for the qualifying person for more than 50 percent of the support of the home. If the qualifying person is your parent, the parent can be your qualifying relative even if you cannot claim an exemption for your parent if the only reason that keeps you from claiming the parent is the fact that the parent earned more than the amount allowed for the exemption. 

If you claim your parent for head of household purposes, you must be entitled to claim a dependent exemption credit for your parent to be head of household. That is true if your parent meets the requirements of a qualifying relative. That is also true if you have paid more than half the cost of keeping up a home that was your parent's main home for the entire year. Your parent's main home could have been his or her own home or any other living accommodation.

There are rules for determining the support of the home and there are rules for determining support of an individual to meet the support test. The items considered to be support items for upkeep of the home are home things such as electricity, gardening, cleaning, maid service and rent or mortgage. Items for support of a dependent are items that are strictly just for the dependent in meeting the support test. These items that only pertain to the individual are items such as clothing, vacations, medical insurance, education and any medical treatment. Cost of food pertains to the support of the household, unless the food is specific for the dependent. This could be the case when the dependent needs special food due to allergies or for medical reasons. Other than that, food is considered a household expense that goes toward the calculations you make for support of the home. This is similar to buying a television set for your child and your treatment of this television set depends on where in the house you hook it up to. If you place the set in the living room, then the TV is household expense that goes in the calculation of support of the home. However, if the set is placed in the dependents room, then it can be considered in the calculation of support for the child.

You are considered to have chosen to treat your nonresident alien spouse as a resident alien if you and your nonresident alien spouse or RDP filed a joint tax return in a previous year. You are also considered to have chosen to treat your nonresident alien spouse/RDP as a resident alien if you choose to treat your nonresident alien spouse/RDP as a resident so you can file a joint tax return. Furthermore, you are considered to have chosen to treat your nonresident alien spouse/RDP as a resident alien if you have not revoked the choice by the extended due date for filing the tax return at issue.

You can be considered unmarried for tax filing purposes. To be considered unmarried for tax filing purposes is not a choice if you lived with your spouse at any time during the last six months of the tax year. The basic tax rule is that if you are married on the last day of the year, you are married. If you are single, then of course you are considered unmarried for tax filing purposes. So once you determine that you are indeed able to be considered unmarried for tax purposes. What then? You want to be able to qualify for Head of household filing status, so you must also meet the other requirements. You must meet other tests such as filing a separate tax return, paying more than half of the upkeep of your home which is the main home for you child for more than half the year, and you must be able to claim that child as a dependent by claiming their exemption. 

If you pay someone for child care expenses which you incur which allow you and your spouse to work or look for work will qualify you to take a child and dependent care expenses credit on your California tax return. You can take the credit if you file as single, married filing jointly, qualifying widow or widower, head of household filing status. However, you cannot take the child and dependent care expenses credit if your filing status is married filing separately. Your child and dependent care expenses credit is a percentage of the federal credit and it depends on your income. In order to figure out the California amount, you must first figure out the federal amount and then apply the percentage to the federal child and dependent care expenses credit amount. The rules for federal and California concerning the child and dependent care expenses credit are very much alike. For example, both federal and California require that your dependent qualifying child be under age 13 at the time child care is provided. If the care is provided for another person, such as a handicapped individual, then of course, the age requirement is disregarded. 

The Internal Revenue should enact a renter's credit just like California allows. For California, you qualify for the Nonrefundable Renter's Credit if you rented a property for more than half the year that was not exempt from California property tax in 2017. Rents are getting very high and many cannot afford to pay rent anymore. The Internal Revenue Service allows for mortgage interest deductions and it is only fair that this same benefit be allowed in form of a renter's credit for the ones who cannot qualify or who don't care to buy a home and pay a mortgage.

The nonrefundable renter's credit, as with the other credits, must be carefully substantiated. With the California nonrefundable renter's credit it is little simpler as it basically only requires that you answer a few questions as to the qualifications. There is a qualification record which you must fill out and keep for your records. If you are preparer, you should be able to present this qualification record to the Franchise Tax Board individual inquiring about how you determine that the taxpayer qualified for the renter's credit. As with other credit, you must ask the right questions to make sure your client qualifies for the nonrefundable renter's credit. For most of us, the computer produces a qualification record automatically. However, we cannot just tell an auditor that the computer created the qualification record automatically. You must make sure you ask the taxpayer the questions presented in the qualification record. Otherwise, what good is it for? It does nobody any good to just print the qualification record. The non-refundable renter's credit qualification record must be kept with your records; therefore, you should not mail it.

If a single employer withheld California State Disability Insurance (SDI) from your wages at more than 0.9% of your gross wages you should contact the employer for a refund. dfdfdfd In 2018, if you worked for at least two employers during who together paid you more than $114,967 in wages, you may qualify for a refund of excess SDI. The key to claiming the credit for excess SDI withheld is how many employers you worked for. If you just worked for one employer, you will not be able to claim the credit for excess SDI withholding. If your taxpayer client wants you to give him or her a credit for excess SDI withheld and they only had one employer, tell him or her that they cannot claim a credit for excess SDI withheld. As a good tax preparer, you need to always make sure the figures from the Form W-2s are calculated correctly. This is especially true if you know that the Form W-2 tax forms are from a small company or if they were handwritten or if they are basically prepared by hand as when they are typewritten instead of computer generated. Not that computers are perfect, but it is more assuring to see forms which are generated by a payroll software.

If you discover that you made an error on your California income tax return after you filed it, use Form 540X to amend your tax return. You should amend your tax return if you forgot to claim a credit, a deduction or if you simply made an adding error. Adding errors are usually caught right away by the Franchise Tax Board and maybe you don't need to file an amended return for that. You should file a Form 540X return to fix your return if the Franchise Tax Board already issued your refund or processed your return and they did not catch the error. If you missed the credit for excess SDI withholding credit for example, you can file the amended Form 540X return to claim the credit or any missed credit for that matter. Many will tell you that filing an amended California tax return is not a good idea. Maybe it is not a good idea if you are committing tax fraud or are trying to hide income to avoid paying tax. However, if everything is as it should be, with the taxpayer reporting only the correct items, credit or deductions, then there is nothing to worry about. If someone tells you that filing an amended tax return is not a good idea, tell them that you don't worry about stuff like since you don't commit tax fraud.

Beginning in taxable year 2010, persons who have entered into a same-sex marriage outside the State of California that is valid according to the laws of the jurisdiction in which the marriage was contracted must file their California income tax return using either the joint or separate filing status. Starting in 2013, this same rule or tax benefit also applies for federal tax returns. A same sex couple can be in a registered domestic partnership if the individual files the appropriate paperwork with the State of California. A registered domestic partner is a person who has filed a Declaration of Domestic Partnership with the California Secretary of State. A person is a registered domestic partnership has the same benefits and rights as do married individuals in the State of California. Therefore, same sex individuals can file their returns as married individual and enjoy the same tax benefits as married individuals who file as married filing jointly.

Slowly the IRS is coinciding with the state of California in tax rules. For the longest time, California has been allowing same sex couples to file their tax returns jointly. In California, all domestic partners are required to either file joint or separate tax returns under the new law. Now, under the federal new law, same sex couples can file jointly for federal tax purposes. Now the way same sex couples file for federal will just transfer over to California tax returns and adjustments or filing status are no longer needed in the California tax return. That sure makes every one's job easier.

Effective for taxable years beginning on or after January 1, 2007, RDPs under California law must file their California income tax returns using either the married/RDP filing jointly or married/RDP filing separately filing status. If you are in a registered domestic partnership, you may qualify to use the head of household filing status if you are in the process of ending your relationship or you meet the requirements to be considered not in a registered domestic partnership.

A like-kind exchange is exchanging a property for another similar property. This means that the exchange if done according to the rules will serve a tax advantage if the items exchanged are of similar quality and serving a similar purpose. An exchange of this sort would usually occur in a business setting. If you hold an asset, you can arrange to exchange it for another replacement asset in order to acquire a tax free advantage.

Starting in January 1, 2014, California has made it a new requirement for taxpayers to report like-kind exchanges of real or tangible property on FTB Form 3840. Thus California has new stipulations and reporting requirements for like-kind property which is exchanged for other like-kind property especially if the property is in California and exchange for property which is located outside of California. In order for the exchange to be considered a tax free transaction for California tax purposes you must meet the requirements of section 1031. First, there must be a true exchange and not a sale of the property. Second, the property you are trading for the other property must be like-kind property. Third, both properties must be for the sole purpose of conducting business or for investment purposes. The properties should not be any property that is part of inventory available for resale or that is held for personal use.

According to IRC section 1031, to determine whether property is or a "like kind" relates to the nature or character of the property and not just to its grade or quality. Maybe it will help to know the different classes of property as stipulated in IRC section 1031. The different classes of property are: (1) depreciable tangible personal property; (2) intangible or non-depreciable personal property; and (3) real property.

Things get a bit more complicated when the exchange of property also includes partial payment or additional non-qualifying property thrown in the deal (which is known as "additional consideration"). In this case the gain to the taxpayer of the other property or "additional consideration" must be recognized but not in an amount exceeding the fair market value of such "additional consideration". In addition, this "additional consideration" may constitute ordinary income to the extent that the gain is subject to the recapture provisions of IRC section 1245 and 1250. In a like-kind exchange, losses may not be recognized.

New tax law TCJA of 2017, however, modifies the existing law providing for non-recognition of gain in the case of a like-kind exchange by limiting its application to real property that is not held primarily for sale. The new rules also state that real property in the U.S. and property in foreign countries will not be considered like-kind exchanges.

However, California does not agree to the new TCJA changes for limiting like-kind exchanges to real property that is not held primarily for sale. California does agree with federal on the federal rules for the exchange for property held for productive use or investment (like-kind exchanges) under IRC section 1031 for the most part (with a few modifications).

If there is no difference between your federal and California income or deductions, do not file a Schedule CA (540). Only file California Schedule CA if there are differences with California and federal deductions or income differences. Your federal return may be allowing or disallowing certain credit or deductions which California does not conform to. Remember that you only file California Schedule CA to make adjustments for nonconformity items on your federal tax return. There is a long list of items for which California does not conform to and therefore you must account for these nonconformity adjustment items on your California Schedule CA.

California and federal coincide with many credits, deductions and tax rules. For example, both California and federal obligate you to timely pay 100% of your tax or you will be faced interest and penalty charges. On time filing for both entities is usually April 15th of every year. You can always pay later, but if you do, you must know that you will be responsible for interest and penalties on the unpaid amounts.

Another credit to look into for California is the Credit for Dependent Parent. You may not claim the Credit for Dependent Parent if you used the single, head of household, qualifying widow (er), or married/RDP filing jointly filing status. Claim this credit only if you were married at the end of 2018 and you used the married filing separately, qualifying widow(er) filing status. In order to claim this credit, you spouse must not have been a member of your household during the last six months of the year. Additionally, you must have furnished over one-half the household expenses for your dependent mother's or father's home, whether or not they lived in your home.

Additionally, if you paid for your parent's medical care, you may be able to deduct the medical expenses. You can claim these medical expenses as an itemized deduction on Schedule A of Form 1040 and then these expenses transfer over to the California tax return. You may have to modify the amounts depending if California conforms to federal thresholds.

If you and your spouse paid joint estimated taxes but are now filing separate income tax returns, one of you may claim the entire amount paid or both can split the amounts in whichever way you wish. You have the freedom to contribute to your account as your wish. Things do happen. If you and your spouse are both contributing by making estimated tax payments and then later divorce or file your tax returns as married filing separately, you can decide how to treat the estimated payments made to the account. The problem would arise when the married couple is fighting or don't agree as to how to allocate the payments.

If all your Form W-2s were not received by January 31, 2019, you need to file your tax return with the Forms W-2 you receive and also with the Form W-2s you did not received. You should be able to get a copy by visiting your employer. If, after you tried to get the form, you were not successful, then you can file a substitute Form W2. This substitute Form W-2 can be used for both your federal tax return and your state tax return. Therefore, if you never received a Form W-2 and you asked your employer for one and employer refuses to issue a form, you should complete Form FTB 3525 with your wage and withholding information in order for you to file your tax return.

Attach a doctor's statement to the back of Form 540 indicating that you or your spouse are visually impaired the first time you file a tax return to claim the blind exemption credit. If you attach a doctor's statement every time you file your tax return, you will just be creating extra work for everyone. Once you attach the doctor's statement the first time, you will have set a trigger in the account and therefore, there is no need for any more attachments.

The new federal TCJA has suspended the personal exemption amounts and so now for federal exemption amounts are zero. California does not conform to the suspension or to the amounts. The 2017 blind exemption amount for California is $114. You can get an additional exemption amount if you are visually impaired and one for a visually impaired spouse. 

There are five tests which you must normally meet in order claim a dependent on your tax return. You must meet the support test, gross income test, member of household or relationship test, the joint return test and the citizenship or residency test. The support test is met if you provide more than 50 percent of the persons support in the year. The gross income test is met if your child does not make more than the federal personal exemption amount for the year. If your child makes more than this amount which is $4,050 for tax year 2017, then you usually cannot claim this child’s exemption or claim the child as a dependent. These are federal requirements that California conforms with as to the gross income rules for claiming a dependent. The child must usually be related to you legally or by blood and live in your household for more than six months of the year. Furthermore, the child must not have file a joint tax return if done so, there would not be any additional tax owed than if the child filed as single. The residency test is met if your child is a citizen of the United States, a U.S. resident alien or a resident of Canada or Mexico. In meeting the residency test, a temporary absence may be due to illness, education, business vacation or military service. A temporary absence can also due to incarceration.

When counting the amount of time which a dependent lives with you, you don't count time away from home due to temporary absences. Time away for certain things such as school is considered temporary absence and this time would count as time in home. If the individual is gone for military purposes, this is also considered a temporary absence. If your dependent is away due medical or vacation then this is also considered to be away on temporary absence and these count as time spent in the home. The other temporary absences are time away due to business, illness and education. The person is temporarily absent if it is reasonable to assume that the person will return after the temporary absence and you continue to keep up the home for this person after the absence. For example, you temporary absent child is away on temporary absence and his or her room is waiting for him or for her to return home. You probably should not rent out your dependent's room it the child is temporarily absent from home.

Sometimes you have a choice of filing status. Many times you don't have a choice. The five filing status options are single, married filing jointly, married filing separately, head of household, and qualifying widow or widower. Each filing status gives you a different standard deduction amount on your federal tax return and at two different standard deduction amounts on your California tax return. If you are single and qualify for the head of household filing status, your standard deduction for California is $8,472 which is the 2017 married filing jointly standard deduction amount. This amount is better than the 2017 amount of $4,236 for a single or married filing jointly taxpayer. The head of household filing status gives you a better tax rate and this filing status also allows you to claim some credit or deductions which are not allowed if you choose the married filing separate filing status. Therefore, for California it is worth the extra effort to gather the qualification requirements for the head of household filing status which for 2017 it is the same as the married filing jointly amount of $8,472.

For 2018, you are considered to be married or an RDP at the end of the year if you were married, of course. You are not considered married at the end of 2018 if you received a domestic partnership, or you filed a Notice of Termination of Domestic Partnership with the California Secretary of State and the six-month waiting period for the notice to become final has passed. You are considered married if your spouse/RDP died in 2018 and you did not remarry or enter into another registered domestic partnership.

You don't always have to prepare your tax return in the same manner as you prepare your federal. For example, if you didn't itemize deductions on your federal tax return it is possible to itemize deductions on your California tax return. For example, your standard deduction for federal is $6,300 if you are single, and your itemized deductions equal $5,000. The $5,000 itemize deduction amount is less than your federal standard deduction of $6,300 so of course you will use the $6,300 because it gives you a better tax benefit. However, for your state the standard deduction amount is less than the $5,000 so of course you will itemize your deductions on your California tax return because $5,000 itemize deduction amount gives you a better tax benefit. Therefore, in this case you would use your standard deduction for your federal tax return but your will itemize your deductions for California.

Zacks; (2018, May 29); The California Penalty for Early IRA Distribution; Retrieved online at https://finance.zacks.com/california-penalty-early-ira-distribution-8115.html

IRS; (2017 September 29); Form 2441 Instructions; Retrieved online at https://www.irs.gov/pub/irs-pdf/i2441.pdf

IRS; (2017 December); California 540; Retrieved online at https://www.ftb.ca.gov/forms/2017/17_540bk.pdf

Turbotax; (2017, December); Steps to Claiming an Elderly Parent as a Dependent; Retrieved online at https://turbotax.intuit.com/tax-tips/family/steps-to-claiming-an-elderly-parent-as-a-dependent/L34jePeT9

Bischoff, Bill; (2018, January 26); New tax law eliminates alimony deductions - but not for everyone; Retrieved online at https://www.marketwatch.com/story/new-tax-law-eliminates-alimony-deductions-but-not-for-everybody-2018-01-23

FTB; (2018, April); Summary of Federal Income Tax Changes 2017; Retrieved online at https://www.ftb.ca.gov/law/legis/Federal-Tax-Changes/2017.pdf

CA.org; (2018, April 26); California Earned Income Tax Credit; (CalEITC); Retrieved online at https://www.ftb.ca.gov/individuals/faq/net/900.shtml

Johnson, Autumn; (2018, April 22); Here's How Taxes Will Really Change For CA Residents in 2018; Retrieved online at https://patch.com/california/livermore/here-s-how-taxes-will-really-change-ca-residents-2018

A. We will also use the C-CPI-U.

B. We will continue to use the same California Consumer Price Index in 2019 we have always used.

C. We will continue to use the CPI-U as an index that measure prices paid.

D. We don't use a price index in California.

A. Does not conform with federal regarding the calculations of an NOL.

B. Does not conform with federal regarding the allowance of an NOL deduction under IRC section 172.

C. Does not conform with federal to the changes to the NOL provisions.

D. All of the above.

A. They must follow legal procedures to dissolve their partnership.

B.  They must file the appropriate paperwork with the California Secretary of State.

C. Once the partnership is dissolved, the individuals go back to filing as single taxpayers for both California and the Internal Revenue Service.

D. All of the above.

A. The new TCJA has expanded the moving expenses to include a larger deduction.

B. The new TCJA will be allowed for commuting from home to your job.

C. California will continue to allow moving expenses at the same federal rules.

D. California will also suspend the moving expenses until January 1, 2026.

A. Look forward to paying the tax on the interest earned from these bonds.

B. Be California tax free because bonds are not taxable to California.

C. Look at your federal tax return closely to see how much state tax you can save.

D. Enter the amount on Schedule CA because the amount is not taxable to California.

A. California does not conform to the TCJA provisions for federal modifications to depreciation limitations on luxury automobiles

B. California does not conform to the TCJA provisions for federal modifications to depreciation limitations on personal use property.

C. Both A and B above.

D. The limit for luxury autos placed in service after December 31, 2017 and in tax years that end after December 31, 2017 is $5,000.

A. Continue to use the same depreciation method that you starting using at the start of your business.

B. Adjust your depreciation and the useful life of the property to acceptable California methods.

C. Discontinue taking depreciation for that property because California does not allow depreciation from other states.

D. Switch to the straight line method for California.

A. When there are issues involving California residency status.

B. When the taxpayer is a not a California domiciled military taxpayer.

C. When the taxpayer is the spouse of a non-California domiciled military taxpayer who resides in a community property state.

D. Any of the above.

A. The plan no longer is allowed to save to be able to pay for college.

B. California conforms to the new TCJA tax reform to include tax education for kindergarten through 12th grade.

C. California wants to keep to the original plan to help families pay for college education for their child for 2018 and beyond. Not just for any education but only for college education.

D. This 529 savings plan which usually has to do with saving money by making any interest received tax-free income when your infant or young child is of college age, is going to help for a child's immediate education by making your interest grow tax free.

A. Reduced the Orphan Drug credit to 50 percent

B. Reduced the Orphan Drug credit to 30 percent

C. No comparable credit but the expenses can be repurposed.

D. Reduced the Orphan Drug credit to 10 percent

A. If you contribute too much to a Roth IRA, you may have to pay a 6% excise tax penalty on your California tax return.

B. California and federal always have the same taxable amount of a distribution due to the basis always being the same.

C. California conforms to federal tax law on contributions, conversions, and distributions of Roth IRAs.

D. California does not conform to all federal deferred compensation, relating to pension, profit sharing, stock bonus plan etc.

A. As far as California is concerned, unemployment is not taxable so you don’t have to worry about asking for California tax withholding from your unemployment compensation.

B. Unemployment compensation is now taxable on your California tax return.

C. For California, you don't need to adjust your federal gross income which includes the unemployment part because both federal and California treat UI benefits in the same manner.

D. The unemployment compensation is taxable to California therefore it should be included in your California gross income.

A. $100 for each failure.

B. $520 for each failure.

C. $1,000 for each failure.

D. None, California conforms to the due diligence requirements but does not conform with federal in charging $520 for each failure.

A. An application and verify it with the IRS.

B. A California Renter's Credit Qualification record.

C. An FTB individual inquiry sheet online.

D. The correct information on the California tax return and no special inquiry is required.

A. It is impossible to itemize deductions on your 2019 California tax return.

B. You have to prepare your tax return in the same manner as you prepare your 2019 federal return.

C. If your standard deduction for federal is $6,300 if you are single, and your itemized deductions equal $15,000, you must use the $6,300 for California because you didn't itemize on you federal return.

D. None of the above.