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California Income Tax Alert!
New Laws May Affect You!

California’s budget was finally approved in September. To help reduce the large deficit there are several ”revenue raisers“ in the package. Some of these may affect you.

Teacher Credit Suspended. The special Teacher Retention Credit is suspended for the year 2002. The size of the credit varies for credentialed teachers. It can be up to $1500 depending upon years of experience. There is a second step - the credit can cut the tax on the teaching income by no more than 50%. Thus a teacher who qualifies for a maximum credit of $1000 might get an actual credit of $400 if the tax attributed to the teaching income is only $800.

Your Credit. You can check the size of last year’s credit by looking at your 2001 California tax return. This should give you an idea of what’s at stake. On your 2001 return fine form 540 - your credit is on Line 28 or 29 on the second page under its Code Number 212. If you didn’t file on Form 540, there was no credit.

Will you owe tax? While you’re looking up your credit from last year, look at the size of your refund (or balance due). Imagine the Credit were to disappear. This should give you a pretty good idea of what will happen this year. If you owe tax it will be due on April 15. Be prepared for it. The good news - no penalty can be charged on balances attributed to the law change.

Coming Back? The law says the credit is suspended for this single year.

Real Estate Sales. Planning to sell a piece of real estate? If so you’re in for a big shock. Beginning January 2003, California now demands that withholding be done on all sales of real estate. There are exceptions: the main ones being for your principal residence, property selling for $100,000 or less, a property on which you certify there is a loss for tax purposes, and properties in a tax-deferred exchange.

3.33% Sales Price Withheld. Imagine you sell a piece of property for $300,000. The mandatory withholding will be $9990! I’m talking about sale price, not proceeds. If you were expecting proceeds of $50,000 after paying off the mortgage, your proceeds are suddenly reduced to $40,000. If these proceeds were supposed to be the down payment for another property you have a big problem!

What can you do? Unless one of the exceptions applies, you’re stuck! You will report the sale when you file your tax return. There may or may not be any income tax. If your tax bill is small you will have a large refund - but not until 2004 when you file your 2003 income tax return. In the meantime, you might reduce your withholding from your wages, or make smaller estimated tax payments. There is no alternative. You have made an interest-free loan to the State of California.

This change is part of the “creative accounting” approach to California’s large budget deficit. The withholding is expected to be far greater than the actual tax owed on these sales. But the withholding will flow into Sacramento in the current fiscal year - the refunds won’t be given until the next year. California’s deficit has been magically reduced.

Other changes. A number of small changes were made. There is a provision to delay the benefit of business losses for two years. And folks who moved into California in the past few years can no longer use special rules to shield pension money. Again, California is shifting expenditures into the future.

Bad news coming? There is still concern over budget shortfalls. Some have suggested we may see more changes after the elections. There is still talk of raising California’s income tax rates. Let’s hope we do not get an unwelcome holiday gift from the Legislature.

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Copyright © 2007 David M. Britton. All rights reserved.