California Major Developments Affecting Individuals

Transcription

1 Chapter 9 California Major Developments Affecting Individuals Conformity Page 9-3 California conforms to IRC as of 1/1/15! Wait for FTB report and to see what lawmakers do.

2 2 FTB Ask the Legal Expert Page Look Up Time Frames at FTB Website Page

3 3 FTB Common Audit Issues Page 9-5 Unreimbursed employee business expenses inadequate records, not seeking reimbursement from employer when available, deducting commuting. Head of Household Status Credits Claiming expired credits, claiming senior credit although not old enough, and misuse of Other State Tax Credit. IRS Audit Follow-up Not notifying FTB within 6 months of receiving IRS adjustment. SL remains open on California return. 5 Page 9-5 FTB Common Audit Issues and Tips Be able to substantiate: Basis of stock and real property sold Be sure all 1031 requirements met Appraisal for large donation Tips: Let examiner know ASAP of Any delay you ll have. If plan to file amended return Any federal audit activity If unable to resolve with examiner, may contact his/her supervisor 6

4 4 New Schedule X For tax years beginning on or after January 1, 2017, Schedule X has replaces Form 540X, Amended Individual Income Tax Return

5 5 Compliance with 6038D Supplement 6038D applies to individuals and certain businesses FTB Legal Ruling , Conformity to Federal Information Filing Requirements Relating to Certain Foreign Financial Assets [Internal Revenue Code section 6038D] (10/16/17) 3 scenarios involving a non-resident alien Intent of CA law it is reasonable to infer that Legislature did not intend to impose a broader filing requirement under RTC (d) than would be required for IRC 6038D because it was enacted as part of general federal conformity legislation, and legislative history of AB 154 does not show any legislative intent to impose filing requirement upon a broader class of individuals than it would be imposed under federal law. Scenarios Airi Non-resident alien Federal must file Form 8938 because holds FFA > filing threshold, and is a specified individual per Reg D-1(a)(2) for 2017 Scenario: Has California source income for 2017, so must file a California return Result: Must attach Form 8938 to CA return or face $10K penalty. Modification: Airi has no CA source income. Result: Need not file Form 8938 in CA. Modification: Airi is not a specified individual for federal so no need to file 8938 for federal Result: Need not file Form 8938 in CA.

6 6 Real Estate Withholding FTB updated Pub 1016 and website Supplement College Access Tax Credit Fund 2017 cash contributions Application due by 5 pm on 11/30/17 (likely also 11/30 for later years) AB 490 extends credit through 2022 Funds available through 2022 = $500 million Individuals and businesses Supplement 12

7 Can approach be expanded to get greater than $10K tax deduction (tax benefit) to Californians? 7

8 8 Recent Proposal SB 227, Protect California Taxpayers Act To add R&T and For tax years beginning on or after 1/1/18, allows 100% credit against net tax for monetary contributions to the California Excellence Fund for public purposes. No deduction for the contribution on California return (but sponsor expects donor gets charitable deduction on 1040). 5 year carryover State Treasurer creates the fund and process R&T 41 n/a FTB Analysis of SB CCA with support for federal deduction - January 2018 article by law profs supporting workability and legality of the Full Deduction Rule: January 2018 article by Tax Foundation noting issues with the plan and others with similar purpose: R&T 41 is an accountability measure, but can be waived by lawmakers For any new tax credit, the legislation must include: Specific goals purposes, and objectives the credit is to achieve Detailed performance indicators for Legislature to use to evaluate whether objectives met Data collection requirements to enable Legislature to determine whether credit is meeting or failing to meet or exceeding the goals set

9 9 Other possibilities? 1. Plan Aims to Turn Property-Tax Bills Into Charitable Deductions to Skirt Overhaul, Wall Street Journal, 1/8/18 NJ lawmaker to propose something similar to SB 227 but for a credit against real property taxes. 2. Impose new tax on employers who would reduce employee pay accordingly. For example: State has flat 10% personal income tax. Employee earns $1,000 and pays $100 income tax Change this to the employer paying a payroll tax of 11.11% on the $900 of wages paid to employee ($900 x.1111 = $100), and repeal income tax on wages. Lowers payroll taxes too. See Prof Hemel post - Or some variation of above concept such as wage credit for employee. Arguably similar to employer share of FICA tax (really paid by worker via lower wages and deductible by employer). Issues: Can t always reduce employee wages (union workers, minimum wage) and more challenging with graduated rate structure. 3. Others? NY Governor Cuomo First, we will challenge the new law in court as unconstitutional the first federal double taxation in our nation s history, violative of states rights and the principle of equal protection. Second, we will lead the nation s resistance to the new law, starting a repeal-and-replace effort: "Tax Fairness for All" campaign. And third, we will take action to protect the state s economy. Specifically, we will explore the feasibility of a major shift in tax policy, and are developing a plan to restructure the current income and payroll tax system, as well as create new opportunities for charitable contributions to support public programs. Page

10 SB 227 Approach Pros and Cons Pros Payments to fund are voluntary so not really a tax. CCA allows it The tax benefit of a federal or state charitable contribution deduction is not regarded as a return benefit that negates charitable intent, reducing or eliminating the deduction itself. There may be unusual circumstances in which it would be appropriate to recharacterize a payment of cash or property that was, in form, a charitable contribution as, in substance, a satisfaction of tax liability. Generally, however, a state or local tax benefit is treated for federal tax purposes as a reduction or potential reduction in tax liability. As such, it is reflected in a reduced deduction for the payment of state or local tax under 164, not as consideration that might constitute a quid pro quo, for purposes of 170, or an amount realized includible in income, for purposes of 61 and Likely easier than a payroll tax credit approach due to graduated rate structure for CA personal income tax, and issues of not being able to reduce employee wages in all situations. Cons 10 Charitable gift? 501(c) issue on definition of charitable contribution - a contribution or gift to or for the use of [gov t] but only if the contribution or gift is made for exclusively public purposes. Quid pro quo issue (donation with 100% tax credit puts donor in same situation at state level than would be w/o the donation; but with federal tax savings. Some USSC cases on this (The Singer Company (1971), American Bar Endowment (1986), Hernandez (1989)). If the benefits expected to be received by a donor are substantial (that is, greater than those incidental benefits that inure to the general public from transfers for charitable purposes), then the transferor has received a quid pro quo sufficient to remove the transfer from the realm of deductibility under 170. Singer Co. v. United States, 449 F.2d 413, (Ct. Cl. 1971). [CCA ] Congress could enact legislation to disallow as charitable contribution. New administration costs to manage the fund and documentation of the donations by Treasurer and FTB. CCA is not binding guidance. Changes to Form 540 Use Tax Line AB 1593 (Chapter 563; 10/7/17) Starting with 2017 Forms 540 Use tax line expanded Enter number on line If zero, check box that none owed or filed a separate use tax form. Remember: Look up table helps + must add tax on any untaxed purchase of $1,000 or more Page

11 11 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Add to table amount: Use tax on any items that cost $1,000 or more each.

12 AB 1717 (Chapter 175; 8/7/17) Page 9-9 & Supplement Purpose per author: removes phrase timely filed from definition of acceptable return. AB 2758 (Chapter 541, Statutes of 2014) ensures that use tax obligations reported on a tax return are paid before any other amounts owed, but only when return is timely filed. Revising the definition of an acceptable return ensures that use tax obligations reported on a tax return continue to be paid before any other amounts owed even when the return is not timely filed. 12 Fuel & Vehicle Fee Increases SB 1 (Chapter 5, 4/28/17) 11/1/17 Gas excise tax 41.7 (up from 29.7 ) Diesel 36 (up from 20 ) 1/1/18, new annual Transportation Improvement Fee starts based on market value of vehicle. Market Value Annual Fee $0 - $4,999 $25 $5,000 - $24,999 $50 $25,000 - $34,999 $100 $35,000 - $59,999 $150 $60,000 or higher $175 1/1/20 - Road Improvement Fee of $100 per zero-emission vehicle applies Page

13 13 SB 398 Changes Page 9-8 Mostly a Global Warming/Cap & Trade Act Chapter 135, 7/25/17 Extends manuf/r&d partial sales tax exemption from 7/1/22 to 7/1/30. Expands to include electric power generation and certain agricultural businesses. Suspends fire prevention fee from 7/1/17 to 1/1/31 Thereafter sunsets. Generally, $ per habitable structure in State Responsibility Area ; started 7/1/11 at $150. Funds made up from cap and trade program. 25 BOE Restructuring! Tax B AB 102 (Chap 16, 6/27/17) and AB 131 Taxpayer Transparency and Fairness Act of 2017 Effective 7/1/17 Board limited functions Property, alcohol and insurance taxes Items in the CA Constitution Dept. of Tax and Fee Administration (CDTFA) New Director Nicolas Maduros of Maryland Most of the taxes BOE previously handled Office of Tax Appeals (OTA) hearings start 1/1/18 Panel of Administrative Law Judges 26

14 14 Select Legislative Proposals AB9 Pink exemption for sales tax (feminine products) AB-34 Children s Savings Account Program AB 53 Homeownership Savings AB 54 Security Alarm System, Surveillance System or Security Fence Deduction AB 198 First-Time Home Buyer Expenses Deduction AB 292 Pet Adoption Costs Deduction AB 361 Apprentice Training Credit AB 420 Allow deductions in personal income tax for expenses related to cannabis businesses. Thus, IRC 280E would not apply for California PIT purposes. AB 624 School Robotics Club Credit AB 942 Veterinary Costs Credit Page 9-9 & Supplement AND Page 9-9 & Supplement AB 274 Would bring back the snack tax!

15 15 And ballot proposal A.G. File No (10/25/17) Amends State Constitution to prohibit state and local governments from levying income or property taxes on any Californian age 55 or over and creates a constitutional ban on state or local estate taxes. Cost = $60 billion per year How much is $60 billion/year?

16 California Gets New Symbol AB 1540 (Chapter 264, 9/23/17) Establishes Augustynolophus morrisi as official state dinosaur. Government Code new reads as follows: (a) The Augustynolophus morrisi is the official state dinosaur. (b) The saber-toothed cat (Smilodon californicus) is the official state fossil. 16 Page