California Tax Update

Transcription

1 California Tax Update Individuals Eva Rosenberg, M.B.A., EA

2 Who is Eva Rosenberg, M.B.A., EA, CTC, CTRS? Eva Rosenberg, EA, Your TaxMama has been teaching Enrolled Agents exam review courses off and on since developing the program for UCLA Extension over 20 years ago. These days, she s teaching her own course online at Eva has a B.A. in Accounting and an M.B.A. in International business. Your TaxMama has been a TaxWatch columnist for Dow Jones' and author of the ever-popular book, Small Business Taxes Made Easy. And the award-winning best-seller Deduct Everything! And the new book The Trump Tax Cut. You can hear her on various radio stations around the country on a regular basis As a speaker, TaxMama is popular with both tax professionals and taxpayers You can find her at where you can subscribe to her free podcast TaxMama is also the moderator of the U.S. Tax Court Group at LinkedIn and invites you to join California Tax Update : 2

3 Table of Topics Introduction Filing Status Personal Exemptions Standard Deductions Tax Brackets Adjustments to Income Taxable Income IRA and Deferred Accounts Basis Retirement Contributions Itemized Deductions Capital Gains Other Income, Loss and Differences Tax Credits Household Employees Filing Deadlines Disaster Deadlines California Tax Update : 3

4 Table of Topics Part 2 - Tomorrow CA conformity or lack of, to Tax Cuts and Jobs Act CA resident vs non-resident CA marijuana-related deductions CA Schedule C differences CA depreciation differences CA cancellation of debt Tax-free exchanges inside and outside California CA pensions after moving out of CA California Estate and Gift issues Using the MyFTB online system Note: We are not covering military rules in any depth. California Tax Update : 4

5 Introduction In December 2015 Congress passed a comprehensive set of laws - the PATH Act of Protecting Americans From Tax Hikes Act Of 2015 In 2017, Congress gave us The Tax Cuts and Jobs Act which became law on 12/22/17 On February 2, 2018, Congress pass the Bipartisan Budget Act of 2018 The State of California conformed to some provisions and not others. This course will help you understand where California tax laws differ from the U.S. Internal Revenue Code in order to prepare your clients 2018 tax returns California Tax Update : 5

6 2018 Filing Status For California, use the same filing status you use on the Federal tax return unless taxpayers are A registered domestic partnership (RDP) California recognizes them as married, IRS does not They must file married/rdp filing jointly or married/rdp filing separately for California If filing as head of household for IRS must meet the requirements to be considered unmarried for California as well If taxpayer filed a joint tax return for federal purposes, they may file separately for California if either spouse was An active member of the United States armed forces or any auxiliary military branch during 2018 A nonresident for the entire year and had no income from California sources during 2018 California Tax Update : 6

7 2018 Personal Exemptions Personal Exemption California 2018 IRS N/A N/A ($4,150) For IRS they are Replaced by Tax Credits MFJ and QW Single HOH MFS IRS /person /person /person /person DEPENDENTS 367 2,000 BLIND and AGE 65 or over (ea) 118 1,400 refundable California permits an exemption for a child who was not claimed on the federal return only so the child could use the education credits California Tax Update : 7

8 CA Exemptions Phaseout The IRS no longer has a phaseout. California Tax Update : 8

9 2018 Standard Deductions Filing Status Married filing joint Surviving spouses Standard Deduction CA $8,802 8,802 IRS $24,000 12,000 Heads of Household 8,802 18,000 Single Individuals 4,401 12,000 Married, filing separate 4,401 12,000 IRS Dependent's Standard Deduction--No more than the greater of $1,050 or $350 plus the individual's earned income IRS Additional standard deduction for aged or blind--$1,250 each ($1,550 if individual is unmarried and not surviving spouse) Routinely, the best place to find all this? (to come) California Tax Update : 9

10 Polling Question #2 If the standard deduction for married couples filing jointly is $8,472, how much is it for a Head of Household? $4,236 $6,354 $8,742 $12,000 10

11 2018 Itemized Deductions Phaseout The IRS no longer has a phaseout California Tax Update : 11

12 CA Tax Brackets IRS Tax Brackets Single & MFS California Tax Update : 12

13 CA Tax Brackets IRS Tax Brackets Married/RDP & Widower California Tax Update : 13

14 CA Tax Brackets IRS Tax Brackets Head of Household California Tax Update : 14

15 Social Security Limits IRS only Doesn t affect CA *Plus 0.9% on wages above threshold amount, plus 3.8% on unearned income above threshold amount. California Tax Update : 15

16 A Few Key Things We Lose in 2018 for IRS but Not for California State and Local Taxes in excess of $10,000 Non-Disaster Casualty losses (theft, fires, etc.) Miscellaneous Deductions subject to 2% of AGI Especially folks with high, unreimbursed employee business expenses Especially folks with high union dues Educators expenses in excess of $250 16

17 CA Adjustments to IRS Taxable Income 17

18 IRS Adjustments to Income Line 23 - Educator s Expense $ Made permanent (Sec 104) Line 33 Student Loan Interest $2,500 (no change) California Tax Update : 18

19 CA Adjustments to Income California Tax Update : 19

20 CA Adjustments to Income California Tax Update : 20

21 IRS/CA Other Adjustment Differences The TCJA has a provision to exclude cancellation of student loan debt from income, when the COD is due to death or disability California does not conform The IRS only allows a moving expense deduction for active duty military California does not conform Self-Employed Health Insurance deduction IRS allows a deduction for insurance coverage for dependents under age 26 For California, add back to income the portion of the premiums covering adult children who provide more than one-half of their financial support California Tax Update : 21

22 Taxable Income Compared The next several pages will outline the IRS and California treatment of a variety of income sources 22

23 IRS/CA Treatment of Income - Wages 23

24 Reminder Payment to Care for Family Members IRS Notice On January 3, 2014, the Internal Revenue Service (Service) issued Notice , I.R.B Notice provides guidance on the federal income tax treatment of certain payments to individual care providers for the care of eligible individuals under a state Medicaid Home and Community-Based Services waiver program described in section 1915(c) of the Social Security Act (Medicaid Waiver payments). Section 1915(c) enables individuals who otherwise would require care in a hospital, nursing facility, or intermediate care facility to receive care in the individual care provider s home. The notice provides that the Service will treat these Medicaid waiver payments as difficulty of care payments excludable from gross income under 131 of the Internal Revenue Code. California conforms to this. California Tax Update : 24

25 IRS/CA Treatment of Income Ridesharing, CQSOs 25

26 IRS/CA Treatment of Income Unemployment & SS 26

27 IRS/CA Treatment of Income - Pensions 27

28 IRS/Calif. Treatment of Income Indians, Clergy 28

29 IRS/CA Treatment of Income Restitution Income 29

30 IRS/CA Treatment of Income Interest Income 30

31 IRS/CA Treatment of Income and Basis Restitution Interest 31

32 IRS/CA Treatment of Income Dividend Income 32

33 IRS/CA Treatment of Income Refund, Alimony, IRA 33

34 Avoiding Taxable California Refunds If at all possible, deduct sales taxes, instead of state income taxes. Why? When you deduct sales taxes, you don t have to report state income tax refunds as income on the following year s tax return You don t have to track all the sales taxes paid. Just use the IRS Sales Tax Calculator. In your tax software, remember to add in the extra sales tax percentage the taxpayer s county or parish charges In addition to the sales tax tables, where the tax is based on your AGI, add the sales taxes paid on big-ticket items like cars, boats, RV, expensive electronics, Rolex watches Besides, some states don t even have income taxes. So sales taxes are your only option / Except in the states that don t have sales or local taxes either! (DE, NH, MN) Of course, you could just not itemize at all and your refund will not be taxed! Made permanent in Sec 106 of PATH Act Limited to $10,000, including all property taxes California Tax Update : 34

35 California Alimony 2018 California does not conform to the TCJA on alimony Payments will still be deductible on the Form 540 Alimony income will still be taxable to the recipient Note: The IRS changes only take effect starting in 2019 for federal tax returns 35

36 California IRA and Deferred Accounts Basis California had a different IRA basis than the IRS way back in history To determine if your client s early IRA contributions have a basis for the FTB use this Publication 1005 it goes back to 1981 This is also good for Roth IRAs and SIMPLEs and MSAs This may affect CA basis in Coverdell ESAs and ABLEs Since CA never recognized HSAs they have a basis For 2018, California conforms to all IRS contributions limits for IRAs and other retirement accounts Not to HSAs at all 36

37 IRS and CA Retirement Contributions 37

38 IRS/CA Treatment of Income - HSA 38

39 IRS/CA Treatment of Income Rents and Clunkers 39

40 Line 21 Miscellaneous Income The Catch-All line typically, use this line to report Hobby income Gambling income Prize winnings and awards (including game shows) California Lottery winnings 1099 income that you don t know what to do with Alaska Permanent Fund Dividends (family?) Kiddie income from (Form 8814) Scholarships, Grants, and other 1099Q Income Foreign Earned Income and Housing Exclusion (Form 2555) Distributions from HSAs & MSAs (Forms 8889 & 8853) Cancellation of debt income Jury pay and other misc. reimbursements NOL carryovers And more California Tax Update : 40

41 Line 21 - Miscellaneous Income IMPORTANT - Deductions When you are forced to report income on Line 21 because of 3 rd party reports, This is ALSO where you deduct that income back out for the IRS. Write See Statement on next to Line 21. Enter the reason for deducting it back out Attach a schedule with details, if applicable, and/or Use the relevant form, like Form Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) If no relevant form avail use Form 8275 Disclosure Statement For California, you may be able to use the Schedule CA 41

42 Itemized Deductions On the next several slides we will be talking about deductions in effect for

43 IRS/CA Itemized Deductions 43

44 CA Treatment of Itemized Deductions under TCJA Medical expenses IRS Reduced by 7.5% California was always 7.5% Sales and Local Taxes (SALT) IRS limits this total deduction to $10,000 California does not Mortgage Interest Deduction IRS limited to loans up to $1,000,000 California does not conform Charitable contribution deduction increase to 60% of AGI California does not conform Casualty Losses IRS limited to Presidentially Declared Disasters California does NOT conform Miscellaneous Itemized Deductions subject to 2% of AGI IRS Eliminated California does NOT conform use all these deductions, including employee business expenses California allows deduction for tickets to sporting events Employer provided meals deduction is not limited to 50% 44

45 CA Treatment of Itemized Deductions under TCJA - Updated Compliance Information Mortgage Insurance Premiums deduction IRS eliminated California no deduction Mortgage Interest Deduction for extra home equity line of credit IRS eliminated California still allows the $100,000 HELOC interest deduction Moving expenses IRS only deductible for armed forces members California still following the old rules - Tax-Changes/ pdf#page=95 45

46 IRS Proposed Regs on Tax Credits for State Taxes Paid California Senate Bill 227 status August 16 hearing: Held in committee and under submission 46

47 Taxes Paid to Other States Although California does not allow a deduction for taxes paid to other states or countries, there is a tax credit. Use Schedule S Other State Tax Credit This is only applicable if the same income is taxed by both California and the other state This does not apply to Alternative Minimum Taxes of the other state, nor can it reduce California AMT This credit is available primarily to CA residents. But non-residents, who reside in certain other states may also use this reciprocal credit Some states taxes do not qualify like Indiana (new) 47

48 California Medical Adjustments We ve already referenced the Health Savings Accounts and adult children The IRS does not allow a deduction for employer-provided health insurance coverage for domestic partners California does Add the value of this coverage back to the IRS return A general note about medical gifts - You may pay anyone s medical expenses as a gift, without any gift tax limitations if you make the payments directly to the medical provider. No deduction is allowed to the donor if the recipient doesn t meet the previous rules 48

49 Mortgage Interest Limits IRS rules Limited to 2 properties Clients choice, consistency not required! Limited to Acquisition debt, plus $100,000 Acquisition debt is amount paid to purchase MORTGAGE and cost of improvements (not repairs!) Limit to loan balances of ALL personal residence mortgages they hold - $750,000 (not per mortgage) PLUS $100,000 = $1,100,000 total debt. We have already mentioned that CA still allows the $100,000 HELOC interest Loans in place before December 15 th are grandfathered under the old law. (not including the $100,000 HELOC) 49

50 IRS/CA Capital Gains CA Has No Capital Gains Rate 50

51 IRS/CA Other Income or Loss 51

52 IRS/CA Other Income Differences 52

53 IRS/CA More Miscellaneous Provisions 53

54 Employee Benefits For 2018 CA IRS Cafeteria Plans (maximum salary reduction) $2,650 $2,650 Commuter benefits (per month)* California allows for many more types of ride-sharing arrangements Bicycle commuter benefits gone per TCJA for IRS only Read IRS Publication 15-b Employer s Guide to Fringe Benefits *This has been extended permanently by Section 105 of PATH Act No limit 260 Parking benefits (per month) No Limit 260 Employee awards non-qualified Employee awards Maximum multiple awards 1,600 1,600 54

55 CA Renters Credit Non-Refundable There is a questionnaire in your tax software 55

56 Child and Dependent Care Credit Allowable expenses up to $3,000 for 2 children IRS Form Multiply expense x decimal CA Form 3506 CA Takes a percentage of IRS credit and phases out at AGI of $100,

57 CA Adoption Credit IRS Form $13,840 - non-refundable credit and $13,840 - employer reimbursement CA Credit code % of qualified adoption costs, up to $2,500 Subject to income phaseout 57

58 Donated Fresh Fruits or Vegetables CA Credit For taxable years beginning on or after January 1, 2017, and before January 1, This tax credit is for donations of fresh fruits or vegetables made to California food banks. The amount of the tax credit is 15% of the qualified value of the donated item, based on weighted average wholesale price. The credit may be claimed only on a timely filed original return. Time to do some planning for ! However, any credit not used in the taxable year may be carried forward up to seven years. Use Form FTB 3814, New Donated Fresh Fruits or Vegetables Credit. 58

59 College Access Tax Credit 59

60 New & Improved CA Earned Income Tax Credit IRS Schedule EIC CA Form

61 Household Employees Paid $2,000 or more during year Need IRS Employer ID Number May pay taxes By increasing payroll tax withholding Or via Form 1040ES Or quarterly payroll tax deposits File W-2 in January Report on 1040 with Schedule H Pay balance due (FUTA, FICA) on the Form 1040 Paid $750 or more during quarter Need CA Employer ID Number - use Form DE 1HW pdf#page=1 Can register and make all payments online Read 64-page household employer guide - File and pay payroll taxes quarterly File and pay annual payroll taxes and W-2 (IRS) 61

62 When Are You Subject to Household Employee Taxes? 62

63 Who Are Household Employees? 63

64 California Filing Deadlines for 2018 Forms Form Due Date Extension Deadline Individual Tax Return April 15, 2019 October 15, Partnership Return (and LLC) Mar 15, 2019 October 15, 2019 S Corporation Mar 15, 2019 September 15, 2019 C Corporation (and LLC) April 15, 2019 October 15, 2019 Exempt Organization (199) May 15, 2019 November 15, 2019 Pension Trust (109) April 15, 2019 October 15, Note: Estimated payments are due on the original due date of the various forms 64

65 California Disaster Deadlines Extended 65

66 Federally Acknowledged California Disasters 66

67 Current Federal Disaster Deadlines Extended 67

68 THANK YOU FOR ATTENDING if you have questions, please go to TaxMama.com and click on Ask A Question I answer questions on weekday mornings 68