CALIFORNIA PERSONAL INCOME TAX COPYRIGHT 1985-2017 CALIFORNIA TAX INSTITUTE (Our 32 nd Year) YORBA LINDA, CA 92886 REVISION JULY 2017 Continuing Education: 5 CE Hours California Tax Law CTEC# 1022-CE-0013 Parts of this publication were provided from information furnished by the Franchise Tax Board. This publication is provided with the understanding that the publisher is not engaged in rendering accounting or legal service.
INTRODUCTION CALIFORNIA TAX INSTITUTE #1022 has been approved by the California Tax Education Council (CTEC) to offer CONTINUING EDUCATION that meets the annual requirement Imposed by the State of California. A listing of additional requirements to renew tax preparer registration may be obtained by contacting CTEC at PO Box 2890, Sacramento, CA 95812-2890, by phone at 916.492.0457, or on the Internet at www.ctec.org. COURSE SCHEDULE CALIFORNIA INCOME TAX #1022-CE-0013 5 Hours Continuing Education Credit (5 hours California Tax Law) This course is based on California Tax Law and reviews California tax law changes. The cost for this program is only $60.00 including shipping unless purchased as a bundle. A. CORRESPONDENCE SCHOOL OPERATING DAYS AND HOURS Office Hours are 9:00 am to 5:30 pm - Monday through Friday (holidays excluded). Our help line is available most evenings until 5:30 pm at 714.777.5939 to answer questions regarding this course. B. EFFECTIVE DATE OF CATALOG January 1, 2017 to December 31, 2017 C. COURSE INFORMATION The CALIFORNIA INCOME TAX correspondence course (#1022-CE-0013) is designed to help you maintain and/or improve your professional and proficiency skills required in the preparation of Federal and California income tax. The correspondence course is comprised of three sections: California Income Tax Examination Student Evaluation The CALIFORNIA INCOME TAX course is recommended to provide five hours California state continuing education. The program has been prepared in accordance with the standards set forth in Circular 230 section 10.6. CE credits have been granted based on a 50-minute hour. The course is self-taught by the student. Advance preparation is not required. The program level is basic California state taxation. Competency of each student is determined by written examination that covers all sections of the course. The CTEC registered tax preparer should read CALIFORNIA INCOME TAX and then answer the review questions related to that section. The answers to the review questions are given with explanation. Complete the final examination at the end of the text. The answer sheet is at the back of this text. Complete the Evaluation form following the answer sheet. D. REFUND POLICY Any student that is not satisfied with this course can receive a complete refund of tuition by returning all course materials in satisfactory condition within 30 days of receipt. E. ENROLLMENT REQUIREMENTS Students may enroll any school day as instruction is offered in continuous modules allowing student entry at any time. To be admitted, a student must be CTEC registered California tax preparer. F. GRANTING OF CREDIT FOR PREVIOUS EDUCATION This course is an all-inclusive course comprised of California income tax instruction. G. ATTENDANCE POLICY The course is self-taught by the student. Competency of each student is determined by written examination
that covers all sections of the course. The course shall be completed within 365 days from placing your order. H. GRADING SYSTEM The student should review text materials prior to taking the open book test. There are a total of 50 review questions with a review of the correct answers and a final examination of 25 open book Multiple Choice questions. Each question has only one answer. The CALIFORNIA TAX INSTITUTE requires a passing score of 70%. A course evaluation will be sent to each participant to evaluate this correspondence course. This section is required by the California Tax Education Council and the Internal Revenue Service and will help us to continue to improve this correspondence course. Upon receiving a passing score of 70%, you will receive your certificate of completion. An additional test will be available to any registrant that does not receive a passing score.
TABLE OF CONTENTS California Exemption Credits 1 Registered Domestic Partners (RDP) Standard Deduction Children With Investment Income Itemized Deduction 2 California Does Not Tax Renter s Credit Mental Health Services Tax Contributions 3 Child and Dependent Care Expenses 4 California Senate Bill 797 5 Mandatory Electronic Payments Net Operating Loss Estimated Tax Payments 2016 6 Head of Household Forms To Use 8 Form 540 2EZ Form 540 Form 540NR Requirements For Filing Residency Social Security and Individual Taxpayer Identification Number Employment Contract Determining Residency 9 Deceased Taxpayer Military Personnel Certain Children With Investment Income 10 Marital Status, Dependents, and Income 11 Other Filing Requirements Determining Filing Status 12 Single Married/RDP Filing Jointly Married/RDP Filing Separate Return Head of Household Costs Included In Keeping Up A Home 14 Costs Not Included In Keeping Up A Home Qualifying Widow(er) With Dependent Child Exemption Credit 15 Personal Exemption Blind (Additional Exemptions) Senior 65 or Over (Additional Exemption) Personal Exemption Credit Dependent Credit (Not Including Taxpayer or Spouse) Total Exemption Credit 16 Exemption Credit for Married/RDP Filing Separately Returns Income Taxable by California 18 Income Not Taxable by California Interest 20 Dividends Business Income (or Loss) Pensions and Keoghs (HR 10) 21 Individual retirement Account (IRA)
Installment Sales Like-Kind Exchange Lump-Sum Distributions Sale of Real Estate 22 Partnership, S Corporation, and Trust Income (Loss) Sale of Stocks and Bonds Division of Income Itemized Deductions 23 Vehicle License Fee for Federal Schedule A 24 Standard Deduction Part-Year Non-Residents First Interactive Review Questions 25 First Interactive Review Answers Schedule CA 26 Difference Between Federal and California Law Depreciation 30 Form FTB 3885A Depreciation and Amortization Adjustment Depreciation of assets Acquired Prior to 01/01/1987 California Schedule D 31 Child and Dependent Care 32 Employee Business Expense 33 Summary of Special Credits 34 Other Taxes and Settlement Programs 37 Alternative Minimum Tax Tax on Early Use of IRA and Keogh Plans Mental Health Service Tax Settlement Programs Use Tax Adoption Credit 39 Renter s Credit Excess California Disability Insurance (SDI) Overpayment 40 Penalties and Interest Late Filing of Return Demand/Failure to Furnish Penalty Late Payment of Tax 41 Interest Other Penalties Installment Payments Collections Fees Paid Tax Preparer s Information Requirements Power of Attorney Filing Date 42 Mailing the Income Tax Return Amended Returns Federal Income Tax Return Changes Estimated Tax Payments 43 Installment Payments Farmers and Fishermen Failure to Make Estimated Tax Payments Common Law Employees Statutory Employees Statutory Non-Employees
Independent Contractors 44 Other Nonresident Issues Net Operating Losses Passive Activities Code of Conduct and Responsibilities Community Property 45 Commingled Property 46 Community Income Beginning and End of Community Property Separate Property Pre-nuptial Agreement Tax Treatment of Community Property for RDP Statute of Limitations Earned Income Credit Second Interactive Review Questions 48 Second Interactive Review Answers Final Examination 49
Summary of the 2016 California Tax Law change is as follows: California Exemption Credits California exemption credits have been increased to $111 for filers and $344 for their dependents. Additional exemptions are allowed for the elderly that are 65 years of age or older. A person that turns 65 on January 1, 2017 is considered to have turned 65 on December 31, 2016 for tax purposes. Exemptions have also been increased for the blind. In 2016, all exemption credits will be limited based upon your client s federal adjusted gross income. If your client s adjusted gross income (AGI), exceeds $182,459 (Single or Married/RDP filing a separate Return), $273,692 (Head of Household), and $364,923 (Married/RDP joint return or qualifying widow(er). Filing Status Registered Domestic Partners (RDP) Registered Domestic Partners (RDP), under California law, must file their income tax returns using either the Married/RDP filing jointly or Married/RDP filing separately filing status. RDPs will have the same legal benefits, protections, and responsibilities as married couples unless otherwise specified. For purposes of California income tax, references to a spouse, a husband, or a wife also refer to a California Registered Domestic Partner (RDP) unless otherwise specified. An RDP that files single for Federal taxes can only file Married/RDP filing jointly or Married/RDP filing separately for California. If your client is an RDP and files Head of Household for Federal taxes your client may file Head of Household for California only if he or she meets the California requirements to be considered unmarried or considered not in a domestic partnership. If your client files a joint return for Federal taxes, he or she may file married filing separately for California if either spouse was: - an active member of the United States armed forces or any auxiliary military branch during 2016. - a nonresident of California for the entire year and had no income from California sources during 2016. Standard Deduction 2016 Single or Married/RDP filing separately $4,129 Married/RDP filing jointly, Qualifying Widow(er) $8,258 or Head of Household Children with Investment Income Children with investment income under 19 or students under 24 who received more than $2,100 investment income during the tax year and had at least one living parent, must file Form 540 and FTB 3800, or include the child s interest and/or dividend income. Form FTB 3803, Parent's Election to Report Child's Interest and Dividends is to be completed. The maximum amount the taxpayer can report on Form 3803 is $10,500 and may not be less than $1,050. Payments and Credits Applied to Use Tax If your client claims Use Tax, his or her payments or credits will be applied to Use Tax first and then followed by state tax owed and then penalties beginning with the 2016 tax year. Dependent Social Security Number Taxpayers claiming an exemption credit for 2016 must write their dependents first name, last name, social security number, and the dependent s relationship to the taxpayer. California Earned Income Credit Your client may qualify for the earned income credit if he or she has wages earned in California that is less than $14,162 and your client has two or more qualifying children; less than $10,088 and your client has one qualifying child; or less than $6,718 and your client has no qualifying children. Your client or client s spouse/rdp does not need to have a child to qualify for this credit but must be at least 25 but under age 65 at the end of 2016. The California Earned Income Credit allows a refund even when no taxes are due. California does not allow the credit for self-employment income. Investment income cannot be more than $3,471. Your client s qualifying child must be his or her son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendent of any of them. The child must be younger than 19 at the end of 2016 and younger than your client or your client s spouse/rdp if filing jointly or a student under the age of 24 at the end of 2016, and younger than your client or his or her spouse/rdp if filing jointly, or any age and permanently and totally disabled. A student is a child who is enrolled as 1
a full-time student during any five months of 2016 or took full-time on-farm training course given by a school or a state, county, or local government agency. The qualifying child must live with your client in California for more than half of 2016. The qualifying child must not file a joint return for 2016 or is only filing to claim a refund of withheld income tax or estimated tax paid. The qualifying child must have a valid social security number unless born alive and died in 2016. If the child does not have a valid social security number by the due date of the tax return, your client will not be able to amend the tax return if he or she receives a social security number after the income tax due date. The California Earned Income Tax Credit form is FTB 2514. Itemized Deductions Itemized deductions may be reduced if your client s federal adjusted gross income (AGI), exceeds $182,459 (Single or Married/RDP filing a separate return), $273,692 (Head of Household), and $364,923 (Married/RDP joint return or Qualifying Widow(er). A California taxpayer may itemize deductions for California taxes even if the individual did not itemize on their federal Schedule A. California does not tax unemployment compensation, Social Security, California lottery winnings, paid family leave benefits, and state income tax refund. The Renter's Credit Renter s credit is available for California residents that paid rent for at least six months in 2016. California adjusted gross income must be $39,062 or less if filing Single or Married/RDP filing separately; or $78,125 or less if Married/RDP filing jointly, Head of Household, or Qualifying Widow(er). The Renter s credit for qualified single or married/rdp filing separately is $60. The Renter s credit for qualified married/rdp filing jointly, head of household, or qualifying widow(er) is $120. Like-Kind Exchange California requires taxpayers that exchange property in California for like-kind property outside of California to file an annual information return with the Franchise Tax Board. Form 540 California taxpayers are required to file Form 540 if they have a tax liability from any of the following items: - Alternative Minimum Tax - Tax on a qualified retirement plan including a Traditional Individual Retirement Plan (IRA) or an Archer Savings Plan (MSA). - Recapture Taxes - Tax on an accumulation distribution from a trust - Deferred tax on certain installment obligations - Tax on a lump-sum distribution - Tax for children under 19 or students under 24 who received more than $2,100 investment income from interest and/or dividends during the tax year and had at least one living parent. Mental Health Services Tax Mental Health Service Tax is an additional tax of 1% and is imposed on taxable incomes over $1,000,000 for tax year 2016. The Affordable Care Act (ACT) Employers are required under the Affordable Care Act to report the cost of health coverage on their employees W-2 in Box 12 using Code DD. Currently employer provided health care benefit is not taxable and allows the employee to see their employer s cost for their health care benefit. Financial assistance will be available through the Health Insurance Premium Tax Credit. The Health Insurance Premium Tax Credit is a refundable credit for 2016 to help individuals and families that meet the standards to afford health insurance coverage purchased through an Affordable Insurance Exchange (Marketplace). Legal residents of California will be able to purchase health insurance through Covered California. The health insurance coverage purchased through Covered California began in January 2016. 2
MINIMAL ESSENTIAL HEALTH CARE COVERAGE The following are examples of minimal essential health care coverage: - Employer-sponsored health care coverage, including self-insurance plans, and retiree coverage. - COBRA coverage. - Health Care coverage purchased in the individual market. - Medicare Part A coverage. - Medicaid coverage. - Children s Health Insurance Program. - Certain types of Veterans health coverage administered by the Veterans Administration. - TRICARE coverage. - Coverage provided to Peace Corp volunteers. - Coverage under the Non-appropriated Fund Health Benefit Program. - Refugee Medical Assistance. - State high-risk plans. - Self-funded health coverage offered to students by universities on or before December 31, 2016. - Other coverage recognized by the Secretary of HHS as minimum essential coverage. - Health insurance through Covered California. STATUTORY EXEMPTIONS FROM OBTAINING MINIMAL ESSENTIAL HEALTH CARE COVERAGE The following is exempted: - Religious Conscience recognized by the Social Security Administration as consciously opposed to accepting any health insurance. - Health Care Sharing Ministry recognized as a member of a health sharing ministry. - Indian Tribes recognized as a member of a federally recognized Indian tribe. - Income below the income tax return filing requirements income is below the minimum requirement to file Short Coverage Gap individual went for three months without insurance. - Hardship individual has suffered a hardship and is unable to obtain coverage. - Affordability individual cannot afford coverage because the cost would exceed 8% of household income. - Incarceration individual is in jail, prison, or similar penal institution. - Not lawfully present individual is illegally in the United States. Contributions A taxpayer can make voluntary contributions to several funds of $1 or more in whole dollar amounts. The amount contributed either reduces the taxpayer s refund or increases the tax amount owed. A taxpayer may only contribute to the funds listed and cannot change the amount contributed after the return is filed. The funds are as follows: - California Seniors Special Fund Contributions to this fund will be distributed to the Area Agency on Aging Councils and excess contributions will be distributed to senior citizens organizations throughout California. - Alzheimer s Disease/Related Disorders Contributions will be used to provide grants to scientists to study Alzheimer s disease and related disorders. - Rare and Endangered Species Preservation Contributions are for the protection of California s endangered species. - State Children s Trust Fund for the Prevention of Child Abuse Contributions are used for the prevention of child abuse and neglect. - California Breast Cancer Research Fund Contributions are used to fund research to prevent and cure breast cancer. The funding also keeps doctors informed on the latest medical discoveries. - California Firefighters Memorial Fund Contributions are used to maintain the Firefighter s Memorial in Sacramento and assist survivors of fallen firefighters. - Emergency Food For Families Fund Contributions are for local food banks to purchase food for delivery. The State Department of 3
Social Services monitors the food distribution. - California Peace Officer Memorial Foundation Contributions maintain the Peace Officer s Memorial in Sacramento and helps the families of fallen peace officers. - California Sea Otter Fund Contributions to this fund are equally divided between the California Department of Fish and Game and the California Coastal Conservatory. The funds are for the preservation of sea otters and improve the near shore ocean ecosystem. - California Cancer Research Fund Contributions are for research for the causes, detection, and prevention of cancer. - School Supplies for Homeless Children Fund. Contributions are for school supplies for homeless children. - State Parks Protection Fund/Parks Pass Purchase. Contributions are used for preservation and protection of California state parks and for the cost of a Vehicle Day Use Annual Pass that is valid at most California state parks. - Protect Our Coast and Oceans Fund. Contributions are used to protect our coast and ocean for educational activities at underserved communities. - Keep Arts in School Fund. Contributions are used by the Arts Council for grants to individuals or organizations administering art programs for children in preschool through 12 th grade. - Revive the Salton Sea Fund Contributions will be used for the restoration and maintenance of the Salton Sea and provide public awareness - California Domestic Violence Victims Fund Contributions will be distributed by Comprehensive Statewide Domestic Violence Program - Special Olympic Fund Contributions will be used for funding activities of the Special Olympics in California - Type 1 Diabetes Research Fund Contributions will be used by the University of California for distribution to authorized diabetes research organizations Child and Dependent Care Expenses will be reported on Form FTB 3506, Child and Dependent Care Expenses. Dependent care must be provided in California and earned income must have a source in California. The Child and Dependent Care Expense Credit is nonrefundable. In general, for taxable years beginning on or after January 1, 2010, California tax law conforms to the Internal Revenue Code as of January 1, 2009. Mello-Roos cannot be deducted as a property tax itemized deduction if they are assessed to fund local benefits and improvements that tend to increase the value of the taxpayer s property. California does not conform to federal tax law for: - Exempt interest from federal bonds and non-california state bonds or non-california municipal bonds. - Section 179. Federal law Section 179 is $500,000 for 2016 and California s maximum expense deduction is $25,000. - First Year Special Depreciation. - Educator Expense. - Health Savings Account. - Domestic Production Activities. - Discharged Mortgage Forgiveness Debt. - Earnings of American Indians on Reservations. - Clergy Housing Exclusion. - Employee Income Exclusions for Ridesharing Fringe Benefits. - State Income Tax Refund. - Alimony Received by a Nonresident Alien. 4
- MACRS Recovery Period for Nonresidential Real Property. - Depreciation of assets acquired prior to January 1, 1987. - Amortization of Pollution Control Facilities. - Clean Fuel Vehicle First Year Deduction. - IRA Basis Adjustment. - Railroad Retirement Benefits. - Social Security Benefits. - Paid Family Leave. - Unemployment Compensation. - California Lottery Winnings. - California Lottery Losses. - Federal NOL. - Reward from a Crime Hotline. - Foreign-earned Income and Housing Exclusion. - Income Received from a Recycling Center for Empty Beverage Containers. - Payments for Wrongful Incarceration. - Survivor Benefits Received for a Public Safety Officer Killed in the Line of Duty. - Alimony Paid by a Nonresident Alien. - Tuition and fees deduction. - Self-employed Health Insurance Deduction. - Annual Tax Paid by a Limited Partnership. - State, Local, and Foreign Income Taxes Paid. This listing is not all inclusive. California Senate Bill 797 California Senate Bill 797 clarifies the definition of who is and who is not exempt from CTEC, California Tax Education Council, registration. CPAs, Enrolled Agents, and attorneys are exempt from CTEC registration. Under certain circumstances, the law also allows employees working under a CPA, Enrolled Agent, and attorney exemption status. All CPAs, Enrolled Agents, and attorneys must sign the returns prepared by their exempt employees so that they are held accountable for the employees work. Tax preparation includes data entry. Individuals who input tax-related data into a computer must register as a CRTP (California Registered Tax Preparer). Mandatory Electronic Payments Taxpayers are required to remit their payments electronically if they make an estimated payment or an extension payment exceeding $20,000 for taxable year 2015 or the total tax liability shown on their original 2014 tax return exceeds $80,000. Once the taxpayer meets this threshold, all subsequent payments regardless of amount, tax type, or taxable year must be remitted electronically. Individuals that do not send the payment electronically will be subject to a one percent noncompliance penalty. The taxpayer can request a waiver from mandatory e-pay if one or more of the following is true: - The taxpayer has not made an estimated tax or extension payment in excess of $20,000 during the current or previous tax year. - The taxpayer s total tax liability reported for the previous taxable year did not exceed $80,000. - The amount paid by the taxpayer is not representative of his/her total tax liability. Net Operating Loss Occurred after January 1, 2013 NOLs shall be carried back to each of the preceding two years based upon when the NOL was incurred as follows: - January 1, 2013 and before January 1, 2014. The carryback amount shall not exceed 50% of the NOL. - January 1, 2014 and before January 1, 2015. The carryback amount shall not exceed 75% of the NOL. - January 1, 2015. The carryback amount shall not exceed 100% of the NOL. Individuals, Estates, and Trusts must compute the NOL carryback on Part IV of Form 3805V, Net Operating Loss (NOL) Computation and Disaster Loss Limitations Individuals, Estates, and Trusts. 5
Estimated Tax Payments 2017 Installments due for taxable year 2017 are required to be 30% of the required estimate tax liability for the 1 st and 4 th required installments, 40% for the 2 nd required installment, and 0% for the 3 rd required installment. Period Payment Due Date January 1 through March 31, 2017 April 18, 2017 April 1 through May 31, 2017 June 15, 2017 June 1 through August 31, 2017 September 15, 2017 September 1 through December 31, 2016 January 16, 2018 Head of Household If the taxpayer is unmarried, his/her unmarried child no longer qualifies the taxpayer for Head of Household filing status if the child is 19 years of age or older, is not a student under age 24, and has gross income equal to or greater than the federal exemption amount ($4,050 in 2016). If the taxpayer is unmarried and his/her unmarried child is under 19 or a student under 24 and pays more than one-half of his/her own support, the child no longer qualifies the taxpayer as Head of Household. California Franchise Tax Board requires taxpayers who use Head of Household filing status to file Form FTB 3532, Head of Household Filing Status Schedule. The schedule reports how the taxpayer determined his or her Head of Household filing status. The completed form must be included with Form 540, Form 540 2EZ, and long or short form 540NR. Part I - Marital Status is used to identify your client s marital status. Part II - Qualifying Person is used to identify the relationship of the person that qualifies your client to choose Head of Household filing status. Part III Qualifying Person Information is used to collect information about your client s qualifying person including the following information: First Name Last Name Social Security Number Date of Birth Status of your client s qualifying person: Full time student under age 24 Permanently and totally disabled Qualifying person s gross income for 2016 Number of days your client s qualifying person lived with your client in 2016. Your client can include days away from your client due to illness, education, vacation, business, military service, and possibly incarceration. Form FTB 3532, Head of Household Filing Status Schedule is on the following page. 6
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Forms To Use The Federal Form 1040, 1040A, or 1040EZ, must be completed before Form 540 or Form 540 2EZ. Form 540 2EZ may be used by taxpayers that are: Single, Married/RDP filing jointly, Head of Household, Qualifying Widow(er), and 0-3 dependents are allowed. Total income is $100,000 or less (Single or Head of Household) or $200,000 or less (Married/RDP filing jointly or Qualifying Widow(er)). Income must be from wages, salaries, tips, taxable interest, dividends, and pensions, taxable scholarship or fellowship grant (only if reported on Form(s) W-2, unemployment compensation reported on Form 1099-G, paid family leave, Social Security, tier 1 and tier 2 railroad retirement payments, and capital gains distributions from mutual funds. Adjustments to income are not allowed. Only tax credits allowed are for California earned income credit, personal exemptions, senior exemption, up to three dependent exemptions, and nonrefundable renter s credit. Tax withholdings may only be from Form W-2 and Form 1099-R. Form 540 will be used by all California residents that do not file Form 540 2EZ. Filers of Form 540 will use Schedule CA to make Federal adjustments to gross income and itemized deductions. Adjustments for the treatment of Capital Gains and Losses will be reported on California Schedule D and transferred to Schedule CA. Depreciation and Amortization will be reported on FTB 3885 and then transferred to Schedule CA. Filers of Form 540 are required to attach a copy of their completed Federal Form 1040 if their Form 1040 contains schedules other than Schedules A or B. Form 540NR California Nonresident or Part-Year Resident Income Tax Return, is used to report California sourced income. California Adjustments from Schedule CA (540NR) is used to make income adjustments to determine the taxpayer s adjusted gross income. REQUIREMENTS FOR FILING 1. RESIDENCY A resident is any individual who is: - In California for other than a temporary or transitory purpose; or - Domiciled in California, but outside California for a temporary or transitory purpose. A taxpayer will be presumed to be a California resident for any tax year in which he/she spends more than nine months in this state. A taxpayer may only have one principal residence. The residence where the taxpayer spends more than six months is considered to be the taxpayer s main residence. - A nonresident is any individual who is not a resident. - A part-year resident is any individual who is a California resident for part of the year and a nonresident for part of the year. 2. SOCIAL SECURITY NUMBER (SSN) OR INDIVIDUAL TAXPAYER IDENTIFICATION NUMBER (ITIN) The Individual Taxpayer Identification Number is issued by the Internal Revenue Service to foreign nationals and others who have a federal tax filing requirement and do not qualify for a social security number. The ITIN is a nine digit number that always starts with the number 9. The ITIN is for tax processing purposes only and can be obtained by filing Form W-7 with the IRS. The ITIN is not available for U.S. citizens. NON RESIDENT ALIEN SPOUSE If the taxpayer s spouse is a non-resident alien, s/he must have either an SSN or an ITIN if: - Taxpayer files a joint return - Taxpayer files a separate return and claims an exemption for his/her spouse, or - Taxpayer s spouse is filing a separate return 3. EMPLOYMENT CONTRACT An individual domiciled in California who is outside California under an employmentrelated contract for at least 546 consecutive days will be considered a nonresident unless: 8
- The individual has intangible income exceeding $200,000 in any taxable year during which the employment-related contract is in effect; or - The principal purpose of the absence from California is to avoid personal income tax. 4. DETERMINING RESIDENCY The following list shows some of the factors to use to determine residency: - Amount of time spent in California versus amount of time spent outside of California; - Location of taxpayer s spouse and children; - Location of taxpayer s principal residence; - Where taxpayer s driver s license was issued; - Where taxpayer s vehicles are registered; - Where taxpayer maintains his/her professional licenses; - Where taxpayer is registered to vote; - Location of banks where taxpayer maintains accounts; - Location of taxpayer s doctors, dentists, accountants, and attorneys; - Location of taxpayer s church, temple, or mosque, professional associations, or social and country clubs of which he/she is a member; - Location of taxpayer s real property and investments; - Location of taxpayer s social ties; - Permanence of taxpayer s work assignment in California. 5. DECEASED TAXPAYER The decedent's income includible on the final return is generally determined in the same way as if the person was still alive except that the taxable period is usually shorter because it ends on the date of death. The method of accounting by the decedent determines the income includible on the final return. Under the cash method the decedent only accounted for money as it was actually or constructively received. Under the accrual method the decedent only accounted for money when it was earned and expense was incurred. The death of a taxpayer that was a partner in a partnership does not close the partnership's tax year before it normally ends. The tax year continues for the remaining partners and the deceased partner. Income earned up to the date of death of the partner is income in respect of the decedent. Income earned after the partner's date of death is income to the estate or successor in interest. The rules for exemptions and deductions for individuals also apply to the decedent's final return. The executor/administrator can claim the personal exemption in full on the final income tax return. If the decedent was another person's dependent, the executor/administrator cannot claim the personal exemption on the decedent's income tax return. Medical expenses paid before death by the decedent are deductible on the final income tax return if deductions are itemized. Medical expenses that are not deducted on the final income tax return are liabilities of the estate and are shown on the federal estate tax return. If the decedent's estate pays the decedent's medical bills within one year of the decedent's death, the executor/administrator can claim the medical deductions on the decedent's final income tax return. Tax return must be filed by appointed executor or administrator of the deceased taxpayer's estate. Deceased and the date of death should be entered next to the deceased taxpayer's name at the top of the tax return. A surviving spouse that did not remarry during his/her tax year may file a joint return by indicating next to the signature that he/she is the surviving spouse. 6. MILITARY PERSONNEL Military pay is not taxable for non-resident military personnel serving in California unless: - California becomes the permanent residence of the military person, or income, other than military pay, is earned by military personnel or spouse in California. Military pay is not taxable for resident military personnel stationed outside California on permanent 9
orders unless: - Spouse remains a California resident. - Military person or spouse has income derived from California sources. California allows an exemption from taxes to any California taxpayer who dies on active duty with any branch of the armed forces of the United States. 7. CERTAIN CHILDREN WITH INVESTMENT INCOME Any child who is under age 19 or a student under age 24 at the end of 2016, and has investment income over $2,100 is taxed at the parent s rate if the parent s rate is higher than the child s rate. If the child s investment income is more than $2,100; use Form FTB 3800, Tax Computation for Children Under 19 with Investment Income, to figure the child s tax. Also include investment income that was not taxed on the child s federal tax return but is taxable under California law. If the child uses Form FTB 3800, he/she must file Form 540, California Resident Income Tax Return or Form 540NR, California Nonresident or Part-Year Resident Income Tax Return. 10
2. WHO MUST FILE Filing Information California Franchise Tax Board 2016 MARITAL STATUS, DEPENDENTS, AND INCOME determine if filing a California income tax return is required for 2016. FILING STATUS AGE CALIFORNIA GROSS INCOME DEPENDENTS 0 1 2 or more Single or Under 65 $16,597 $28,064 $36,664 Head of Household 65 or older* 22,147 30,747 37,627 Married/RDP filing joint Under 65 (both) 33,197 44,664 53,264 or Married/RDP filing 65 or older (one) 38,747 47,347 54,227 Separate** 65 or older (both) 44,297 52,897 59,777 Qualifying Widow(er) Under 65 28,064 36,664 65 or older 30,747 37,627 Dependent of another Under 65 More than the standard person - any filing status 65 or older deduction FILING STATUS AGE CALIFORNIA ADJUSTED GROSS INCOME DEPENDENTS 0 1 2 or more Single or Under 65 $13,278 $24,745 $33,345 Head of Household 65 or older 18,828 27,428 34,308 Married/RDP filing joint Under 65 (both) 26,558 38,025 46,625 or Married/RDP filing 65 or older (one) 32,108 40,708 47,588 65 or older (both) 37,658 46,258 53,138 Separate* 65 or older Qualifying Widow(er) Under 65 24,745 33,345 65 or older 27,428 34,308 Dependent of another Under 65 More than the standard person - any filing status 65 or older deduction * A person born on January 1, 1952 is considered to be 65 in 2016. OTHER FILING REQUIREMENTS Your client must file a return if any one of the following applied for 2016. Your client owes special taxes that include: - Recapture taxes - Tax on an accumulation distribution from a trust - Tax on a lump-sum distribution - Tax for children under age 19 or student under age 24 who have investment income greater than $2,100 - Tax on qualified retirement plan including an IRA or an Archer Medical Savings Account (MSA) - Alternative Minimum tax - Deferred tax on certain installment obligations 11
3. FILING STATUS DETERMINING FILING STATUS A taxpayer s filing status for California must be the same as the filing status used on the taxpayer s federal income tax return (except RDP). If an individual did not file a federal return because he/she did not have a federal filing requirement, he/she should use the filing status he/she would have used had the individual been required to file. An individual may file either a joint return or separate return if either spouse was: - An active member of the United States Armed Forces during 2016; or - A nonresident for the entire year and had no income from California sources during 2016. ** The income of both spouses/rdps must be combined; both spouses/rdps may be required to file a return even if only one spouse/rdp had income over the amounts listed. RDPs are registered with the California Secretary of State as Registered Domestic Partner and are required to file using the Married/RDP filing jointly or Married/RDP filing separately filing status. SINGLE A taxpayer may file Single if he/she was not married or an RDP on the last day of the tax year or has obtained a Final Decree of Divorce or Separate Maintenance and does not qualify to use another status. The taxpayer could also file Single if all the following apply: - S/he was married but lived apart from his/her spouse for the entire year, and - S/he provided more than half the cost of maintaining his/her home during the tax year, and - His/her home was the principal home of his/her child or stepchild for more than 6 months of the tax year, and - The child was his/her dependent. MARRIED/RDP FILING JOINTLY RETURN A couple may file a joint return if: They were married or an RDP on the last day of the tax year, both agree to file a joint return, and they were residents of California for the entire tax year (does not apply to military personnel on active duty). Federal filing status for RDP will be Single. California does not recognize common law marriages. - Taxpayer s spouse/rdp died in 2016 and the taxpayer did not remarry or enter into another registered domestic partnership in 2016. - Taxpayer s spouse/rdp died in 2017 before the 2016 tax return was filed. If your client filed jointly for federal taxes, you may file them separately for California if either spouse was: - A nonresident for the entire year and had no income from California sources during 2016. - An active member of the United States armed forces or any auxiliary military branch during 2016. MARRIED/RDP FILING SEPARATE RETURN A couple meeting Married/RDP filing jointly returns requirements may file Married/RDP filing separate return if they choose. RDP will file Single for federal taxes. A separate return must be filed if either spouse/rdp was not a California resident for the entire tax year. A Married/RDP couple filing separately must: - Include half of all community income on each return. - Include all separate income on their respective return. - Both must itemize or not itemize. - Both must enter other spouse's name and social security number in spaces provided on Form 540. HEAD OF HOUSEHOLD If a taxpayer filed federal Form 1040NR or Form 1040NR-EZ, the taxpayer does not qualify to use the Head of Household or Married filing jointly filing status. Instead, the individual must use Single, Married filing separately, or Qualifying Widow(er). RDP can file Head of Household if s/he meets Head of Household filing requirements. The general rules to qualify for California Head of Household filing status are: 12
- Taxpayer was unmarried or considered unmarried as of the last day of the year, and - Taxpayer paid more than half the costs of keeping up his or her home for the year, and - Taxpayer s home was the main home for the taxpayer and another person who lived with The taxpayer for more than half the year, and - The other person was taxpayer s qualifying relative or foster child, and - The taxpayer was not a nonresident alien at any time during the year. To be unmarried or considered unmarried the taxpayer must meet the following requirements: UNMARRIED For Head of Household purposes unmarried means one of the following: Never married. Divorced under a final court decree. Legally separated under a final court decree. Marriage annulled under a final court decree. Widowed (spouse died in a previous tax year). Taxpayer paid more than half the cost of keeping up his or her home as the main home for one of the qualifying persons listed below: Taxpayer s birth child, stepchild, grandchild, adopted child, brother, sister, half-brother, half-sister, stepparent, grandparent, stepbrother, stepsister, son-in-law, daughter-in-law, father-in-law, mother-in-law, brotherin-law, or sister-in-law, who lived with taxpayer for more than half of 2016 and for whom taxpayer was entitled to claim dependent exemption credit; or taxpayer s blood-related uncle, aunt, nephew, or niece who lived with taxpayer for more than half of 2016 and for whom taxpayer was entitled to claim a dependent exemption credit. Taxpayer s unmarried child no longer qualifies taxpayer for head of household status if he/she is 19 years of age or older, is not a student, and has gross income equal to or more than $4,050. Taxpayer s foster child who lived with taxpayer during all of the tax year and for whom taxpayer is entitled to claim a dependent exemption credit. A foster child is one who is in the care of someone (other than the child s parent) who cares for the child as his or her own child. The foster relationship must have begun while the child was a minor. In 2016, for a child to qualify as taxpayer s foster child, the child must either be placed with taxpayer by an authorized placement agency or by order of a court. The child of a person taxpayer lived with is not taxpayer s foster child, even if the child lived with taxpayer all year, because the child was in care of his/her parent. Taxpayer s parent for whom taxpayer provided more than half the cost of keeping up a home for all of the tax year and for whom taxpayer is entitled a dependent exemption credit. Taxpayer s parent need not live with taxpayer. OR CONSIDERED UNMARRIED For Head of Household purposes considered unmarried means: Taxpayer was legally married on the last day of the year, but lived apart from spouse at all Taxpayer paid more than half the cost of keeping up his or her home as the the main home for one of the qualifying persons listed below: Taxpayer s birth child, stepchild, or adopted child who lived with taxpayer for more than half of the year and for whom taxpayer is entitled to claim a dependent exemption credit. Taxpayer s foster child who lived with taxpayer during all of the tax 13
times during the last six months of the tax year. year and for whom taxpayer is entitled to claim a dependent exemption credit. A foster child is one who is in the care of someone (other than the child s parents) who care for the child as his or her own child. The foster relationship must have begun while the child was a minor. The child of a person taxpayer lived with is not taxpayer s foster child, even if the child lived with taxpayer all year, because the child was in the care of his or her parent. Two or more people sharing the same household may not claim the Head of Household filing status. Taxpayer is keeping up a home only if taxpayer pays more than half of the costs of keeping up the home. If two or more families occupy the same dwelling, but maintain separate finances, and each family does not contribute to the support of the other family, each family may be treated as keeping up a separate home. Costs Included In Keeping Up A Home - Rent. - Mortgage interest. - Property taxes. - Home insurance. - Repairs. - Utilities. - Food eaten in the home. Costs Not Included In Keeping Up A Home - Clothing. - Education. - Medical treatment. - Vacations. - Life insurance. - Transportation. - Rental value of a home your client owns. - State Aid to Families with Dependent Children monies received do not count as amounts your client paid. QUALIFYING WIDOW(ER) WITH DEPENDENT CHILD - The taxpayer's spouse must have died during either of 2 tax years prior to the current tax year, and - The taxpayer did not remarry prior to the end of the current tax year, and - The taxpayer has a dependent child, stepchild, foster child, or adopted child that lived with the taxpayer for the entire year, and - The taxpayer paid more than half the cost of keeping up his/her home for the child. - Client could have filed a joint return with his/her spouse for the year his/her spouse died. - Client's dependent child, stepchild, adopted child or foster child lived with him/her (except for temporary absences). - Client paid over one-half the cost of keeping up the home for this child for the whole year. - Do not claim an exemption for client's spouse. 14
4. EXEMPTION CREDITS PERSONAL 2016 NUMBER OF EXEMPTIONS (1) Single 1 (2) Married/RDP Filing Jointly 2 (3) Married/RDP Filing Separate Return 1 (4) Head of Household 1 (5) Qualifying Widow(er) 2 BLIND (ADDITIONAL EXEMPTIONS) - Single 1 - Husband/RDP 1 - Spouse/RDP 1 - Both Husband and Spouse/RDPs 2 A married/rdp couple filing jointly and both are blind can claim 4 exemptions. The first year that your client claims the blind exemption credit, s/he must include a doctor's statement to Form 540 or Form 540 2EZ indicating that s/he is visually impaired. Your client is visually impaired if s/he cannot see better than 20/200 while wearing glasses or contact lenses, or if your client s field of vision is not more than 20 degrees. An individual who is someone else's dependent may not claim this credit. SENIOR 65 OR OVER (ADDITIONAL EXEMPTIONS) - Husband/RDP 1 - Spouse/RDPs 1 - Both Husband and Spouse/RDPs 2 - A married/rdp couple filing jointly and the husband/rdp is 65 and the spouse/rdp is less than 65 can claim 3 exemptions PERSONAL EXEMPTION CREDIT Each personal, blind, and senior exemption is worth $111. DEPENDENT CREDIT (NOT INCLUDING TAXPAYER OR SPOUSE) Credit is allowed for each listed dependent To claim an exemption for each of your client's dependents, write each dependent's name, Social Security number or Individual Tax Identification Number and relationship on Form 540 or Form 540 2EZ in the space provided. The persons listed as dependents on Form 540 or Form 540 2EZ must be the same persons that were listed on the federal income tax return. Each exemption is worth $344 for 2016 for dependents other than taxpayer and spouse. 15
EXAMPLE 2016 Married/RDP taxpayers, both under 65, filing jointly with two dependent children. Their Federal AGI is $425,573. 2016 a. Enter Federal AGI $425,573 b. Enter filing status amount $364,923 Single or married/rdp filing separately $182,459 Head of Household $273,692 Married/RDP filing jointly or Qualifying widow(er) $364,923 c. Subtract line b from line a $60,650 d. Divide line c by $2,500 ($1,250 if 25 married/rdp filing separately). If the result is not a whole number, round it to the next higher whole number (24.26 rounds to 25). e. Multiply line d by $6 $150 f. Enter the number of personal, blind, and 2 senior exemptions Form 540 g. Multiply line e by line f $300 h. Enter the personal exemption credit $222 dollars claimed on Form 540/540A (2 x $111 = $222) i. Subtract line g from line h. If zero or $-0- less than zero enter $-0- j. Enter the number of dependents claimed on 2 line 10, Form 540 k. Multiply line e by line j $300 l. Enter the dollar amount from line10, $688 Form 540 (2 dependents x $344 = $688) m. Subtract line k from line l. If zero or $388 less than zero, enter $-0-. n. Add lines i and line m. $388 Line n is your client s exemption credit that is reported on Line 32, Form 540. In this example, the exemption credit was limited to $388 instead of $910 due to their Federal AGI exceeding $364,923. EXEMPTION CREDITS FOR MARRIED/RDP FILING SEPARATELY RETURN When taxpayers file separate returns, the taxpayer and his/her spouse/rdp must each claim their own personal exemption credit. When a taxpayer has more than one dependent supported by community funds, the taxpayer and his/her spouse/rdp may divide the number of dependents between them in any manner they choose. Taxpayers/RDPs may not split the exemption credit for any one dependent. 5. INCOME TAXABLE BY CALIFORNIA WAGES, SALARIES, AND OTHER EARNINGS Taxpayer must include everything he/she receives in payment for personal services in his/her gross income. EXAMPLES OF INCOME TAXPAYERS MUST REPORT (NOT ALL INCLUSIVE) - wages, including salaries, fringe benefits, bonuses. - commissions, fees, and tips. - dividends. Dividends are distributions of money, stock, or other property that corporations pay to stockholders. They also include dividends your client receives from a partnership, an S corporation, or an estate or trust. If total dividends exceed $1,500, Schedule B must be completed. 16
Dividends include: - ordinary dividends. - these are paid out of earnings and profits and are ordinary income. - nontaxable distributions. -these distributions are nontaxable until your client gets back all of his/her cost. Do not report as dividends the following: - mutual insurance company dividends that reduced the premiums your client paid. - amounts paid on deposits or accounts from which your client could withdraw. money (reported as interest on line 8a Form 1040). - interest Examples of interest you must report: -accounts with banks, credit unions, and savings and loan associations. -building and loan accounts. -notes, loans, and mortgages. -tax refund interest. -bonds and debentures. - bond deposits, bonus, notes, mortgages on which your client receives payments, certain arbitrage bonds accounts with savings and loans association, mutual savings bond, credit unions, in certain instances part of federal Social Security benefits and tier 1 railroad retirement benefits may be taxable. - partnership income and S corporation income reported on Schedule K-1. - tier 2 and supplemental annuities under the railroad retirement act. - original issue discount. - distributions from an Individual Retirement Arrangement (IRA), including SEPs. - amounts received in place of wages from accident and health plans (including sick pay and disability pensions) if your client's employer paid for the policy. - bartering income your client received. - business expense reimbursements your client received that are more than s/he spent for these expenses. - alimony, separate maintenance, or support payments received. - the value of free tours received from a travel agency for organizing a group of tourists. - the value of a gift or other item of nominal value given to taxpayer for opening an account at a bank or savings institution. (toaster) - benefits received under a credit card disability or unemployment insurance plan that exceed the amount of premiums paid during the tax year. - Pulitzer, Nobel, and other prizes in recognition of past accomplishments (in religious, charitable, scientific, artistic, educational, literary, or civic fields) are claimed as income unless your client meets all of the following requirements: - your client was selected without any action on his/her part to enter the contest or proceeding. - your client is not required to perform substantial future services as a condition to receive the prize or award, and the prize or award is transferred directly to a governmental unit or tax exempt charitable organization as designated by your client. - life insurance proceeds that are more than the premiums paid. - profits from businesses and professions. - your client's share of profits from partnerships and S corporations. - profits from farming. - pensions, annuities, and endowments. - lump-sum distributions. - gains from the sale or exchange of: - real estate. - securities. - coins. - gold. - silver. - gems. - other property. - gains from the sale of your client's personal residence that are greater than the excludable amount. 17